Are Progressive Tax Rates Progressive Policy?
92 N.Y.U. Law Review (Dec. 2017 Forthcoming)
61 Pages Posted: 10 Apr 2016 Last revised: 21 Mar 2017
Why do income tax systems across the world consistently feature progressive marginal rates? The existing literature tells a political story focusing on the top of the rate schedule and the preferences of the poor and middle class. According to this standard view, higher rates at the top result from the poor and middle class using the political process to “soak the rich.” However, this explanation is inconsistent with research showing that public policy is generally more responsive to the preferences of the rich. Explaining marginal rate progressivity as a universal (and exceptional) triumph of the poor and middle class rings hollow.
This Article resolves the tension in the extant literature by demonstrating how progressive marginal rates are consistent with the preferences of the rich. Marginal rate progressivity is the combination of two policies–higher rates at the top and lower rates at the bottom. This Article shifts the focus to the bottom of the rate schedule and argues that the rich and middle class benefit from inframarginal tax cuts – rate cuts at low levels of income. The intuition is that taxpayers benefit from rate cuts if they occur at a level that is at or below their own income.
This means that rate progressivity is not entirely progressive policy. Increasing marginal rates at the top increases the progressivity of the fiscal system. But marginal rate cuts at low levels of income can have the opposite effect. They are particularly pernicious because they can be framed as “low-income” tax cuts. A cynical view of marginal rate progressivity is that it allows the rich and politicians to pay cheap lip-service to progressivity, even though there are many better tools available for achieving that goal. Unfortunately, cutting inframarginal rates remains politically popular. Both House Speaker Ryan and President Donald Trump’s tax plans feature such tax cuts prominently. Understanding the regressive effect of inframarginal rate cuts has never been more important.
Keywords: tax reform, tax systems, progressive marginal rates, tax models
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