The following is an excellent excerpt from the book “CAPITAL In the Twenty-First Century” by Thomas Piketty translated by Arthur Goldhammer from Chapter Fourteen titled “Rethinking the Progressive Income Tax” from page 493 and I quote: “In the previous chapter I examined the constitution and evolution of the social state, focusing on the nature of social needs and related social spending (education, health, retirement, etc.). I treated the overall level of taxes as a given and described its evolution. In this chapter and the next, I will examine more closely the structure of taxes and other government revenues, without which the social state could never have emerged, and attempt to draw lessons for the future. The major twentieth-century innovation in taxation was the creation and development of the progressive income tax. This institution, which played a key role in the reduction of inequality in the last century, is today seriously threatened by international tax competition. It may also be in jeopardy because its foundations were never clearly thought through, owing to the fact that it was instituted in an emergency that left little time for reflection. The same is true of the progressive tax on inheritances, which was the second major fiscal innovation of the twentieth century and has also been challenged in recent decades. Before I examine these two taxes more closely, however, I must first situate them in the context of progressive taxation in general and its role in modern redistribution.
The Question of Progressive Taxation – Taxation is not a technical matter. It is preeminently a political and philosophical issue, perhaps the most important of all political issues. Without taxes, society has no common destiny, and collective action is impossible. This has always been true. At the heart of every major political upheaval lies a fiscal revolution. The Ancien Regime was swept away when the revolutionary assemblies voted to abolish the fiscal privileges of the nobility and clergy and establish a modern system of universal taxation. The American Revolution was born when subjects of the British colonies decided to take their destiny in hand and set their own taxes. (“No taxation without representation”). Two centuries later the context is different, but the heart of the issue remains the same. How can sovereign citizens democratically decide how much of their resources they wish to devote to common goals such as education, health, retirement, inequality reduction, employment, sustainable development, and so on? Precisely what concrete form taxes take is therefore the crux of political conflict in any society. The goal is to reach agreement on who must pay what in the name of what principles—no mean feat, since people differ in many ways. In particular, they earn different incomes and own different amounts of capital. In every society there are some individuals who earn a lot from work but inherited little, and vice versa. Fortunately, the two sources of wealth are never perfectly correlated. Views about the ideal tax system are equally varied.
One usually distinguishes among taxes on income, taxes on capital, and taxes on consumption. Taxes of each type can be found in varying proportions in nearly all periods. These categories are not exempt from ambiguity, however, and the dividing lines are not always clear. For example, the income tax applies in principle to capital income as well as earned income and is therefore a tax on capital as well. Taxes on capital generally include any levy on the flow of income from capital (such as the corporate income tax), as well as any tax on the value of the capital stock (such as real estate tax, an estate tax, or a wealth tax). In the modern era, consumption taxes include value-added taxes as well as taxes on imported goods, drink, gasoline, tobacco, and services. Such taxes have always existed and are often the most hated of all, as well as the heaviest burden on the lower class (one thinks of the salt tax under the Ancien Regime). They are often called “indirect” taxes because they do not depend directly on the income or capital of the individual taxpayer: they are paid indirectly, as part of the selling price of a purchased good. In the abstract, one might imagine a direct tax on consumption, which would depend on each taxpayer’s total consumption, but no such tax has ever existed.
In the twentieth century, a fourth category of tax appeared: contributions to government-sponsored social insurance programs. These are a special type of tax on income, usually only income from labor (wages and remuneration for nonwage labor). The proceeds go to social insurance funds intended to finance replacement income, whether pensions for retired workers or unemployment benefits for unemployed workers. This mode of collection ensures that the taxpayer will be aware of the purpose for which the tax is to be used. Some countries, such as France, also use social contributions to pay for other social spending such as health insurance and family allowances, so that total social contributions account for nearly half of all government revenue. Rather than clarify the purpose of tax collection, a system of such complexity can actually obscure matters. By contrast, other states, such as Denmark, finance all social spending with an enormous income tax, the revenues from which are allocated to pensions, unemployment and health insurance, and many other purposes. In fact, these distinctions among different legal categories of taxation are partly arbitrary.
Beyond these definitional quibbles, a more pertinent criterion for characterizing different types of tax is the degree to which each type is proportional or progressive. A tax is called “proportional” when its rate is the same for everyone (the term “flat tax” is also used). A tax is progressive when its rate is higher for some than for others, whether it be those who earn more, those who own more, or those who consume more. A tax can also be regressive, when its rate decreases for richer individuals, either because they are partially exempt (either legally, as a result of fiscal optimization, or illegally, through evasion) or because the law imposes a regressive rate, like the famous “poll tax” that cost Margaret Thatcher her post as prime minister in 1990.
In the modern fiscal state, total tax payments are often close to proportional to individual income, especially in countries where the total is large. This is not surprising: it is impossible to tax half of national income to finance an ambitious program of social entitlements without asking everyone to make a substantial contribution. The logic of universal rights that governed the development of the modern fiscal and social state fits rather well, moreover, with the idea of a proportional or slightly progressive tax.
It would be wrong, however, to conclude that progressive taxation plays only a limited role in modern redistribution. First, even if taxation overall is fairly close to proportional for the majority of the population, the fact that the highest incomes and largest fortunes are taxed at significantly higher (or lower) rates can have a strong influence on the structure of inequality. In particular, the evidence suggests that progressive taxation of very high incomes and very large estates partly explains why the concentration of wealth never regained its astronomic Belle Epoque levels after the shocks of 1914-1945. Conversely, the spectacular decrease in the progressivity of the income tax in the United States and Britain since 1980, even though both countries had been among the leaders in progressive taxation after World War II, probably explains much of the increase in the very highest earned incomes. At the same time, the recent rise of tax competition in a world of free-flowing capital has led many governments to exempt capital income from the progressive income tax. This is particularly true in Europe, whose relatively small states have thus far proved incapable of achieving a coordinated tax policy. The result is an endless race to the bottom, leading, for example, to cuts in corporate tax rates and to the exemption of interest, dividends, and other financial revenues from the taxes to which labor incomes are subject.
One consequence of this is that in most countries taxes have (or will soon) become regressive at the top of the income hierarchy. For example, a detailed study of French taxes in 2010, which looked at all forms of taxation, found that the overall rate of taxation (47 percent of national income on average) broke down as follows. The bottom 50 percent of the income distribution pay a rate of 40-45 percent; the next 40 percent pay 45-50 percent; but the top 5 percent and even more the top 1 percent pay lower rates, with the top 0.1 percent paying only 35 percent. The high tax rates on the poor reflect the importance of consumption taxes and social contributions (which together account for three-quarters of French tax revenues). The slight progressivity observed in the middle class is due to the growing importance of the income tax. Conversely, the clear regressivity in the top centiles reflects the importance at this level of capital income, which is largely exempt from progressive taxation. The effect of this outweighs the effect of taxes on the capital stock (which are the most progressive of all). All signs are that taxes elsewhere in Europe (and probably also in the United States) follow a similar bell curve, which is probably even more pronounced than this imperfect estimate indicates.
If taxation at the top of the social hierarchy were to become more regressive in the future, the impact on the dynamics of wealth inequality would likely be significant, leading to a very high concentration of capital. Clearly, such a fiscal secession of the wealthiest citizens could potentially do great damage to fiscal consent in general. Consensus support for the fiscal and social state, which is already fragile in a period of low growth, would be further reduced, especially among the middle class, who would naturally find if difficult to accept that they should pay more than the upper class. Individualism and selfishness would flourish: since the system as a whole would be unjust, why continue to pay for others? If the modern social state is to continue to exist, it is therefore essential that the underlying tax system retain a minimum of progressivity, or at any rate that it not become overtly regressive at the top.
Furthermore, looking at the progressivity of the tax system by examining how heavily top incomes are taxed obviously fails to weigh inherited wealth, whose importance has been increasing. In practice, states are much less heavily taxed than income. This exacerbates what I have called “Rastignac’s dilemma.” If individuals were classified by centile of total resources accrued over a lifetime (including both earned income and capitalized inheritance), which is a more satisfactory criterion for progressive taxation, the bell curve would be even more markedly regressive at the top of the hierarchy than it is when only labor incomes are considered.
One final point bears emphasizing: to the extent that globalization weighs particularly heavily on the least skilled workers in the wealthy countries, a more progressive tax system might in principle be justified, adding yet another layer of complexity to the overall picture. To be sure, if one wants to maintain total taxes at about 50 percent of national income, it is inevitable that everyone must pay a substantial amount. But instead of a slightly progressive tax system (leaving aside the very top of the hierarchy), one can easily imagine a more steeply progressive one. This would not solve all the problems, but it would be enough to improve the situation of the least skilled significantly. If the tax system is not made more progressive, it should come as no surprise that those who derive the least benefit from free trade may well turn against it. The progressive tax is indispensable for making sure that everyone benefits from globalization, and the increasingly glaring absence of progressive taxation may ultimately undermine support for a globalized economy.
For all these reasons, a progressive tax is a crucial component of the social state: it played a central role in its development and in the transformation of the structure of inequality in the twentieth century, and it remains important for ensuring the viability of the social state in the future. But progressive taxation is today under serious threat, both intellectually (because its various functions have never been fully debated) and politically (because tax competition is allowing entire categories of income to gain exemption from the common rules).”
[THE AUTHOR HERE GETS INTO WHAT IS THE FAIREST WAY TO RAISE REVENUE TO RUN ANY COUNTRY. HE COMES DOWN ON THE SIDE OF HAVING A PROGRESSIVE INCOME TAX ON INDIVIDUALS, AS WELL AS CORPORATIONS. HE GOES BACK AS FAR AS THE AMERICAN REVOLUTION IN THIS SEGMENT WHEN THE U.S. FOUGHT BRITAIN FOR OUR INDEPENDENCE. IF YOU’RE GOING TO WIN A CIVIL WAR, WHICH WE WERE IN, YOU’RE GOING TO HAVE TO FINANCE THE ARMY YOU’RE SUPPORTING, OTHERWISE, YOU’LL LOSE. WE WON THE WAR BECAUSE OF THE PATRIOTS WHO SIGNED THE DECLARATION OF INDEPENDENCE AND CHOSE GEORGE WASHINGTON AS THEIR LEADER. AFTER THE WAR, THEY FORMED A U.S. CONSTITUTION, WHICH WAS SIGNED BY A LOT OF THESE SAME PATRIOTS, SUCH AS THOMAS JEFFERSON, JOHN ADAMS, BEN FRANKLIN. THEY CHOSE GEORGE WASHINGTON TO BE THEIR FIRST PRESIDENT. THIS ALL TOOK PLACE BECAUSE THEY HAD A PLAN AND BOLD LEADERSHIP TO CARRY IT OUT AND THE ROLE A FAIR TAXING SYSTEM PLAYED IN IT.
LaVern Isely, Overtaxed Independent Middle Class Taxpayer and Public Citizen and AARP Members