Taxation Theory Economists

Taxation Theory Economists

Taxation Theory Economists and political theorists (Dalton, Tawney, and others) have adduced four main arguments for making taxation progressive: that the benefits of Government expenditure vary more than proportionately with income; that the sacrifice is less among people with higher incomes; that progressive taxation can reduce economic fluctuations; that it lessens economic inequality.

Other economists have produced counter-arguments. First, benefits cannot easily be related to income or property; the public benefits that bear a rough relation (such as police protection or fire-fighting services) form only a very small part of the whole. Secondly, although it seems common sense that the better-off should pay a higher proportion of their income than the less well-off, the argument does not rest on the 'diminishing marginal utility of money', once widely accepted as the economic justification for progressive taxation, for it supposes that personal needs and the capacity to satisfy them can be compared. There is nothing in economics which enables us to measure the satisfaction derived by different people from different incomes. It does not say that the 'last' £50 of an accountant's £2,000 a year adds more or less satisfaction than the 'last' £50 of a bricklayer's f800. Nevertheless, on other grounds, progressive taxation may be desirable because it seems to equalize 'sacrifice'.

Thirdly, by leaving a larger proportion of income with taxpayers when incomes are falling, and a smaller proportion when they are rising, progressive taxation may help to reduce fluctuations in expenditure and so help to avoid booms and slumps. But this does not require taxation to be progressive; the same 'compensatory' effect over the trade cycle could be produced by changes in the rates of tax.

Fourthly, the view that progressive taxation lessens economic inequality because government s spend money in more desirable ways than do rich individuals (e.g. they build hospitals before hotels) is 'static'. In time, the number of hospitals might be increased by allowing the exceptionally gifted to have hotels. Further, incomes are now less unequal than in the past. Nevertheless, since the distribution of income reflects monopoly, chance, fraud, changes in the value of money, and inequality of opportunity, progressive taxation could reduce the differences. But a progressive tax cannot distinguish between sources of income: it takes a higher percentage of large incomes whatever their origins whether merit or chance. The remedy is to prevent fraud, control monopoly, maintain the value of money and remove other distortions. Luck and chance are ingrained in human nature and the organization of society. Differences in inherited environment upbringing and education result in part from the institution of the family; they may be weakened but they cannot be eradicated by taxation alone.

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