Incentives for progressive income taxation
| Published date | 01 January 2019 |
| DOI | 10.1177/0951629818809420 |
| Author | M Socorro Puy |
| Date | 01 January 2019 |
| Subject Matter | Articles |
Article
Journal of Theoretical Politics
2019, Vol.31(1) 66–102
ÓThe Author(s) 2018
Article reuse guidelines:
sagepub.com/journals-permissions
DOI: 10.1177/0951629818809420
journals.sagepub.com/home/jtp
Incentives for progressive
income taxation
M Socorro Puy
Department of Theoretical and HistoricalEconomics, University of Ma
´laga, Spain
Abstract
This study analyzes the electoral incentives for redistributive income taxation when the incum-
bent strategically decides the degree of tax progressivity. Progressivity makes the median voter
prefer more government spending, which induces left-wing incumbents to foster progressivity
and right-wing incumbents to propose flat taxation. However, if (i) more progressivity reduces
middle-income voters’ fear of left-wing policies with respect to right-wing policies, (ii) parties’
office holding incentives are high, and (iii) there is low uncertainty about the median voter, then
left-wing incumbents opt for less-progressive taxation and right-wing incumbents opt for more
progressive taxation. In addition, we show that voters’ risk aversion over private consumption
implies that right-wing incumbents propose more progressivity in comparison with left-wing
incumbents proposing less progressivity. Our theoretical prediction can explain why, for example,
Democrat Kennedy contributed to decreasing progressive taxation and Republican Bush contrib-
uted to increasing progressive taxation.
Keywords
Taxpolicy; progressive taxation; redistribution; incumbent–challenger model
1. Introduction
The political economy literature has made great advances in showing that progres-
sive over regressive income tax schemes dominate modern democracies, and that
from a theoretical perspective, we can provide conditionsunder which a progressive
over a regressive tax scheme results in a context of political competition.
1
However,
still little progress has been made in modeling the differences, in terms of the level
Corresponding author:
M Socorro Puy,Facultad de Ciencias Econo
´micas y Empresariales, Dpto.Teora e Historia Econo
´mica, Campus
El Ejido, Universidadde Ma
´laga, 29013 Ma
´laga, Spain.
Email: mps@uma.es
of progressivity and redistribution, provided by left-wing over right-wing govern-
ments. This paper analyzes the incentives faced by strategic governments to manip-
ulate the tax structure. We analyze whether political competition exerts any effect
on the direction of the implemented progressive taxation.
Analysis of the Organization for Economic Co-operation and Development
(OECD) countries by Johansson et al. (2008) revealed that the level of income tax
progressivity in countries such as Australia, France, Sweden, Ireland, or Canada
has substantially varied over the last three decades, and that decreasing or increas-
ing progressivity has not been a pattern commonly seen during this period and
among these countries.
Paying specific attention to the direction of the implemented federal tax system
in the US for the period 1960–2016, Figure 1 shows the average tax rate levied on
the median-income household alongside the political party holding the US presi-
dency.
2
Two observation are in order.
First, we observe four major tax cuts to the median-income US household. The
two former tax cuts, in 1964 and 1977, were carried out under Democratic presiden-
cies, and the two others, in 1981 and 2001, were signed by Republican presidents.
3
This fact reveals that both Republicans and Democrats have been responsible for
each of the two major tax income releases tothe middle class.
Second, there are four major tax increments to the median-income household.
Three of them are not directly associated with tax reforms but are a consequence
of both inflation and economic growth. However, the tax increment to the median
income around the late 1980s is due to the 1984 Tax Reform Act. This reform by
president R. Reagan intended to reduce income taxation, but due to economic
growth, the median household increased its average tax rate by the end of the
Republican period 1984–1990. We deduce that no direct enacted tax reform
intended to increase average tax rates to middle-income households.
4
Figure 1. Average tax rate and government ideology in the US, 1960–2016.
Puy 67
Figure 2 shows the ratio between the top marginal tax rate to the wealthiest
individual and the average tax rate to the median-income household. The purpose
of Figure 2 is to provide an alternative measure of progressivity where higher val-
ues of this ratio indicate higher progressivity. We observe large swings in progres-
sivity for the second half of the 20th century, and small shifts in the few last
decades. Top marginal tax rates were extremely high, around 90% at the beginning
of the analyzed period. Top tax rate reduced to 70% in the mid-1960s, to 50% in
the early 1980s, and finally moved below 40% in the mid-1980s under R. Reagan
presidency. Since then, top marginal tax rates have remained quite stable and in no
case have been increased above 40%. We observe that the major reduction in pro-
gressive income taxation took place around the 1980s with Republican R. Reagan
and, in the last few decades, we observe that there is no clear distinction between
Republicans and Democrats, and both have contributed to increasing
progressivity.
The empirical analysis of US progressive taxation by Piketty and Saez (2007)
suggests that accounting for deductions, exemptions along with favored treatment
to capital gains, large reductions in tax progressivity took place under Republican
presidencies (Reagan in the 1980s and Bush in the early 2000s), whereas Clinton
administration was the only one responsible for a significant increase in tax pro-
gressivity. When restricting attention to marginal income tax rates, however, we
deduce that Reagan substantially reduced tax income progressivity whereas in the
last few decades, Clinton, Bush, and Obama contributed to increasing
progressivity.
The analysis in Figures 1 and 2 reveals that for the last few decades, there are
no big differences between Democrats and Republicans, and both have contributed
to certain increasing progressivity. The US’s income tax codes do not follow a clear
pattern by which left-wing governments (Democrats) always promote progressive
Figure 2. Progressive taxation and government ideology in the US, 1960–2016.
68 Journal of Theoretical Politics 31(1)
To continue reading
Request your trial