The Appropriate Roles for Equity and Efficiency in a Progressive Income Tax
24 Fla. Tax Rev. ___ (2020 Forthcoming)
49 Pages Posted: 22 Oct 2019 Last revised: 6 Dec 2019
Date Written: October 15, 2019
Increased focus on economic efficiency in formulating tax policy, at the expense of achieving equity, has resulted in decreased rate progressivity in our individual income tax. This decrease has exacerbated inequality.
There are several explanations for the intense focus on efficiency and reduced emphasis on equity. Predictions of efficiency gains from low individual income tax rates appear more certain than equity gains from progressive tax rates. Efficiency gains seem measurable, while equity gains appear intangible and unquantifiable. In addition, distributive justice, which underlies and shapes tax equity, exists in many abstract forms, some of which may not require progressive tax rates.
This article argues, however, that the emphasis on efficiency is misplaced. Inequality imposes measurable costs on the health, social wellbeing and intergenerational mobility of our citizens, as well as on our democratic process, which are corroborated by significant empirical analysis.
In contrast, anticipated efficiency gains from low individual tax rates are speculative. A consensus exists among economists that taxes within the historical range of rates in the United States have little or no impact on labor supply. Moreover, economists cannot agree whether the myriad empirical studies on savings indicate that progressive tax rates decrease, increase, or have no impact on savings in the United States.
The clear harms arising from inequality and the uncertain harms arising from progressive tax rates, strongly support always giving equity at least equal weight with efficiency in formulating tax policy. But given the high level of inequality in the United States and the currently low and flat tax rate structure, equity should be given more weight than efficiency at this time.
Keywords: Tax Policy, Tax Equity, Efficiency, Inequality, Progressive Income Tax Rates
JEL Classification: H20, H21, K34
Suggested Citation: Suggested Citation