UK tax system is more progressive than thought, says IFS

progressive tax system

This kind of tax helps lower-income families pay for basics such as shelter, food, and transportation. A progressive tax allows them to spend a larger share of their incomes on cost-of-living expenses. The recent turmoil in UK financial markets was in part a reaction to the announcement of unfunded tax cuts in the fiscal event of 23 September that ultimately brought down the Liz Truss government. The new Chancellor Jeremy Hunt is set to outline tax and spending when he delivers the Autumn Statement on 17 November. In a context of low growth and increasing income and asset inequality for millions of households, our Deputy Director Prof Adrian Pabst spoke with Dr Larissa Marioni, a Senior Economist in NIESR’s Public Policy team.

In 1944 and 1945, the highest top rate was 94%, to pay for World War II. Countries around the world are struggling with shrinking fiscal space; debt levels are close to record highs, interest payments are increasing rapidly due to high inflation, and the global economic outlook is very uncertain. As governments consider the role of taxation to respond to this environment, we outline in this blog three reasons why maintaining or increasing the progressivity of the tax system is important. These reasons are drawn  from insights gained from the most recent round of the World Values Survey, the latest World Bank Poverty and Shared Prosperity Report and a new World Bank working paper.

Tax efficiency

The marginal tax rates for an individual range from 10% to 37% in 2023, with the wealthiest Americans subject to the highest rate. Others argue that the tax code benefits wealthy individuals who can avoid income tax through tax breaks. Its schedule of marginal tax rates imposes a higher income tax rate on people with higher incomes and a lower income tax rate on people with lower incomes. Each dollar the individual earns places them into a bracket or category, resulting in a higher tax rate once earnings meet a new threshold.

Representative Alexandria Ocasio-Cortez, D-N.Y., proposed a 70% tax rate on incomes above $10 million. Such a plan would add $291 billion to federal revenues between 2019 and 2028. The U.S. top rate was more than 70% from 1936 to 1964, and then again from 1968 to 1970.

Economic effects

Progressive taxes, particularly direct income taxes, are a key channel for governments to reduce inequality in the short run. This has been highlighted by the latest World Bank Poverty and Shared Prosperity Report, which includes a detailed discussion on how taxes, transfers, and subsidies impact inequality across Church Accounting: The Definitive Guide For Growth countries. Only a few governments in low and middle-income countries currently utilize progressive taxation (and transfers) to dramatically reduce income inequality. A re-orientation towards direct income taxes and away from indirect taxes will greatly assist governments in creating a more equitable society.

progressive tax system

Instead, they pay 10% on the first $11,000 of income, 12% on income from $11,001 to $44,724, and 22% for the amount over $44,725. In the early days of the Roman Republic, public taxes consisted of assessments on owned wealth and property. For Roman citizens, the tax rate under normal circumstances was 1% of property value, and could sometimes climb as high as 3% in situations such as war. These taxes were levied against land, homes and other real estate, slaves, animals, personal items and monetary wealth. By 167 BC, Rome no longer needed to levy a tax against its citizens in the Italian peninsula, due to the riches acquired from conquered provinces.

Comparing Marginal and Average Tax Rates

Tax incidence is said to “fall” upon the group that ultimately bears the burden of, or ultimately has to pay, the tax. The key concept is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply. In addition to having a federal progressive tax system, many states also apply higher state tax rates to higher-income individuals.

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