Argument: Bottom-up progressive taxation leads to stronger growth
"Progressive Taxation Increases Growth". Democrats and Liberals. 7 Dec. 2005 - During the Bush administration taxes have become more and more regressive: Taxes on the rich have decreased with a variety of Bush tax cuts, while taxes on the poor remained high with payroll taxes and sales taxes. This is the Republican way; they say their policies increase economic growth. Democrats, however, believe in progressive taxation where the poor pay less and the rich pay more. Democrats say, and I will show, that progressive taxation is the way to economic growth.
In his book, Ravi Batra presents some history to show that decreasing the top-bracket tax rate decreases growth:
- 1950s Tax Rate = 91%; Average Yearly Growth = 4.1%
- 1980s Tax Rate = 28-50%; Average Yearly Growth = 3%
In the 1980s and 1990s regressivity was emphasized with the payroll tax burden that falls on the low-end worker. The result? Decreased economic growth.
So history tells us, first, that very high tax rates on high income people - 91% in the '50s - may not be fair, but they do not hurt economic growth.
Secondly, we learn that if the top tax rate is decreased, the economic growth rate is decreased. Why is that? Because when the tax on the rich is reduced, the taxes must be paid by the poor. This is regressive taxation, which hurts economic growth. What we need is lower taxation, not for the rich, but for the poor. Batra tells us:
- "Now a low tax burden for the poor and and the middle class automatically means a high burden for the rich. That is why a progressive tax system produced much higher growth in U.S. history, and a regressive system did the opposite."
"The efficient side of progressive income taxation". European Economic Review. 2002 - This paper examines allocative properties of progressive income taxation when individuals care about their relative income. It shows that introducing a progressive income tax can yield a Pareto improvement if pre-tax income is evenly distributed. Implementing undistorted choices of working hours requires a progressive tax schedule, and the optimal degree of progressivity decreases with pre-tax income inequality.