Comment & Debate
Edwin R. A. Seligman. “Progressive taxation in theory and practice”. American Economic Association. 1894 – Tax Avoidance
If the need to defend against a depredation psychology has its subtle effects on voluntary associations, it also puts a premium on slyness as practiced by the individual taxpayer. A well- known book company advertises a “Federal Tax Course” and offers a special report guaranteed to show what deductions can legally be claimed for business expenses such as transportation, entertainment, lodging, gifts, theatre tickets, club dues, and bills, and “your wife’s expenses if she travels with you.” Another special report is advertised as showing how “men in the $20,000 to $100,000 class can virtually cut their tax in two” by dividing income among the family. In come can be transferred to minor children; property used in a business can be turned over to a member of the family and leased back (at a rent deduction); income-producing property can be sold from one member of a family to another to gain a depreciation advantage; and so on. All of this comes under the heading of “tax avoidance,” which is perfectly legal. Nevertheless, a great deal of energy is necessarily diverted into the business of defending oneself against the government—a loss of energy which might be put to far more productive purposes, with society the richer for it all around.
Tax-Exempt Securities
Finally, to protect against depredation psychology, the rich seek refuge in tax-exempt bonds. Thus potential risk capital disappears into the sink of dead-horse debt. This is the ultimate commentary on progressively taxing “last dollars.” Ironically, it would take a “degressive tax,” i.e., one that taxed “last dollars” least, in order to bring money from tax exempts back into the pool of risk money that should be available to the man with a new idea.
The late Professor Henry Simons of the University of Chicago economics faculty argued that the case for drastic progressions in income taxation “must be rested on the case against inequality.” If the human race has a natural interest in human variation, then the case for progressive taxation is indeed “uneasy” (to use the phrase of Walter Blum and Harry Kalven, Jr.). But if equality (in the leveling sense) can by any stretch of the imagination be considered the touchstone of the good society, then the progressive tax falls into place as a relevant means to the achievement of social justice. But it is only one relevant means, and if it is left to operate alone it will not achieve its leveling end.
For better or worse, the progressive income tax in America has obviously not achieved an equalitarian result. This does not mean, however, that it should be written off as socially innocuous. Instead of introducing a leveling principle into society, it has resulted in some strange distortions of the social pyramid. While it has not produced equality, it has resulted in a very practical denial of the old American ideal of “equality of opportunity.”
The reason for this is that it tends to stratify classes as they are. Since it is a tax on income, not a capital levy, it leaves old ownership intact without encouraging new—or additional ownership. The rich (within inheritance tax limits) tend to keep their fortunes. But Joe Doakes can hardly aspire to amassing a fortune—or even a sizable nest egg—on his own if he attempts to do it out of saving for investment purposes. (The fact that millions have risen into “middle income status” since the time of the income tax amendment has been due to the fecundity of American production, with its fantastically efficient machine development, not to any “redistribution” effected by the tax.)
“Flat Tax: What Would It Do For Ireland?”. Business and Finance Magazine. 5 May 2005 – elimination of loopholes in the tax code will reduce the marginal benefits of tax evasion for Ireland’s wealthiest 5%, bringing their income into the tax base. This means that, assuming a 25% flat rate tax on all income with a standard zero-tax deduction of Eur20,000 (scenario one), the overall tax burden will shift right. This means that relative to the current status quo, the peak tax liability will no longer fall on to Ireland’s middle-class families, but will be shouldered predominantly by the highincome earners with personal income in excess of Eur80,000.
This effect is similar to the experience of the income tax cuts in the UK and the US in the 1980s. If before the tax cuts, the top 10% of UK earners contributed only 32% of income tax revenue, after the changes in the tax rates, the group’s contributions increased to 45%. In Alberta, Canada, following the provincial government adoption of flat rate taxation, the overall budgetary contributions from the top 15% of earners increased from 62% in 2000 to 67% in 2004. Importantly, low-income workers enjoyed significant relief: in 2000 the bottom 50% of wage earners paid 3% of the provincial tax burden while by 2004, this figure fell to 1.5%.
This also implies that, with an enlarged tax base, Ireland’s fiscal position can only improve under the initially revenue-neutral flat rate, once the benefits of growth and savings from compliance costs are factored in. Under scenario one (see chart), the expected benefits in revenue enhancement can reach between 0.07% and 0.2% of GDP in the year following the reform. These benefits will be further augmented by higher labour force participation rates and returns to entrepreneurial risk-taking that are encouraged by the flat tax system.
In the Russian case, the combined effects of flat tax introduction amounted to an over 50% increase in government revenue and nearly a quarter of the growth in GDP. The same happened in Estonia and Slovakia. Among the economies more similar to Ireland, the UK Channel Islands and Hong Kong provide strong evidence as to the long-run effects of the flat rate taxation of personal income.