Most people want their taxes to be progressive, with 'richer' people paying more.
Economists tend to favor taxes which are efficient and don't distort behavior.
Is there a tax which is relatively efficient and also relatively progressive?
What's the most efficient *progressive* tax?
byu/Scrapheaper inAskEconomics
Posted by Scrapheaper
3 Comments
I’d say land value taxes; taxing the unimproved value of land.
Supply of land being fixed, taxing it based on location won’t result to deadweight loss because the quantity supplied won’t decrease.
Caveat: Land valuation has to be accurate and land markets have to be competitive for this to be the case.
The extend of progressiveness is more tricky, but owning land in desirable locations tends to correlate with high net worth. Therefore, in general, higher incidence would fall on higher income households.
I can think of other candidates, namely pigouvian taxes and inheritance taxes, but I think neither dominates lvt on both aspects.
It’s income tax, as the easiest to set bands for progressive rates and collect. This is why most countries do this. Everything else is more complicated, less efficient to specify, administer and collect.
With many of the more efficient taxes (e.g. value added tax, land value tax) you can pair them with a lump sum benefit, and the result is, in effect, progressive taxation.
For example, if you simultaneously hand out $20 per month to everyone and apply a 10% tax on consumption (a sales tax of some sort), a person consuming $200 pays a 0% rate overall, a person consuming $400 pays 5%, and so on. The effective rate approaches the statutory 10% as consumption increases. If you consume less than $200, your rate is negative (you get money out of it, on net, rather than paying in).
Of course it depends on what kind of progressivity you want. The scheme I describe makes it so that the poor pay less. It’s not so good at making it so that the rich pay more. So if the latter is important to you, you need something else as well.