Ain’t Spudda wondrous?

Note the implication: health and education spending as well as progressive taxation deliver reduced inequality. And these are the themes the IMF then builds on, suggesting that there are now three ways in which inequality might be tackled.

The first is by more progressive taxation:

Personal income tax progressivity has declined steeply in the 1980s and 1990s, and has remained broadly stable since then. The average top income tax rate for OECD member countries fell from 62 percent in 1981 to 35 percent in 2015. In addition, tax systems are less progressive than indicated by the statutory rates, because wealthy individuals have more access to tax relief. Importantly, we find that some advanced economies can increase progressivity without hampering growth, as long as progressivity is not excessive.

Let’s not beat about the bush: this is the IMF (of all organisations) making clear that we now have insufficiently progressive taxation; that we could have more of it; that this would be beneficial in most cases; and that this will not have negative growth consequences (as is almost glaringly obvious to anyone who has thought in any way appropriately about this issue, but which is welcome, nonetheless).

What they actually say is:

Empirical evidence suggests that it may be possible to
increase progressivity without adversely affecting economic
growth, for instance, by raising marginal tax
rates at the top in countries with relatively low rates
and progressivity.

Which then leaves open the question of just how progressive are we?

Page 7 of the report tells us, we’re around and about average, both in the Gini points that the total tax and spend system reduces inequality by and also in the portion of that which is due to taxation rather than spending. We’ve not got low rates nor progressivity, the potential to raise doesn’t apply to us.

Which is what they all said a couple of years back too, that you can lower the Gini by 12-14 points or so without killing the goose but not much more than that. Which is a little less than what we currently do.

This is also fun, isn’t it?

Economic theory suggests that taxing capital income
can lower efficiency. Specifically, a comprehensive
income tax that includes capital income effectively
taxes future consumption at a higher rate than current
consumption, thereby discouraging saving and
thus investment and economic growth. Moreover,
it means that an individual who earns most of his
or her income early in life pays more in tax than
another who earns the same lifetime income, but
spread out over time. Based on these arguments,
some economists contend that only consumption
or—equivalently—labor income should be taxed.27
Although this is a powerful argument, there are
negative equity consequences of taxing only consumption,
given that the richest individuals may
consume only a fraction of their wealth during
their lifetime. A compromise between solely taxing
consumption and taxing income comprehensively
can be achieved by creating tax-favored vehicles,
such as pension funds, that can allow individuals to
save efficiently for their life cycle needs, while still
taxing capital incomes of individuals with much
higher wealth

Those pension reliefs should stay then, eh?

8 comments on “Ain’t Spudda wondrous?

  1. ‘as well as progressive taxation deliver reduced inequality’

    Taking money from people who have more reduces inequality? And leaves those with less no aspiration. The communist dream. You get ahead, they’ll cut you down to size.

    And people’s right to be treated equally under the law is subservient to reduced inequality?

  2. Since top tax rates exceeded 100% under Wilson, a fall in “progressivity” was inevitable. Note that average top tax rate for 1981 is quoted *after* Howe cut the top UK tax rate from 98% to 60% and thereby *increased* the receipts from higher rate tax. That proves that it is possible to increase spending on health and education by reducing the level of confiscatory taxation.

  3. MOAR TAX! His idea of reducing inequality is to level down not level up. As he’s only equipped with a hammer (tax) he sees every problem as a nail.

  4. So in the same day he wants to abolish tax relief on pensions and and to grant it? Is it his medication talking?

  5. I’m sure I once read Spud on his blog complaining that his pension fund had been a bit of a stinker.

    Wouldn’t be like him to let bile spite and envy cloud his judgement.

  6. page 12. So we should cut the 45% (and the very high rate caused by the withdrawal of exempt income if you earn 150k+)

    Changes in social preferences do not seem to support
    higher welfare weights for the very rich. Figure 1.16
    shows how the optimal top marginal income tax
    rate would change as the social welfare weight on
    high-income individuals increases. Assuming a
    welfare weight of zero for the very rich, the optimal
    marginal income tax rate can be calculated as
    44 percent, based on an average income tax elasticity
    of 0.4 and a Pareto index of 2.2 in the most recent
    years.20

  7. @ BiND
    Wife #1 was an accountant, wife #2 is a GP. A 50:50 split of assets and earnings might favour Richard rather than the two Mrs Murphys.

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