Tax Progressivity and Income Inequality

The question of tax progressivity – who should bear the tax burden – is a central one for tax policy. It has concerned tax philosophers for over a century, and has often dominated political debate over tax-reform options. The issue was certainly prominent in the U.S. presidential campaign of 1992, during which the Democrats proposed tax cuts for the middle class accompanied by tax increases for the wealthy and certain corporations. The Republicans countered by stressing the economic costs of higher taxes and proposed instead tax cuts on capital gains, which are largely received by upper-income individuals, and (at the Republican convention) an across-the-board tax cut for individuals.

The prominence of the tax progressivity issue puts economists in an uncomfortable position, because we know in our heart that progressivity is not solely an economic question. It is equally a matter of ethics, or moral philosophy, because it involves choosing between situations where some people are better off and others worse off. Economics cannot settle which people are more deserving. Economic reasoning cannot determine whether it is a good idea to take one dollar from a wealthy family in order to give one dollar – or, even more problematically, fifty cents – to a poor family.

Lionel Robbins, in his influential book An Essay on the Nature & Significance of Economic Science (first published in 1932), argued persuasively that for such issues the role of the economist should be to lay out the implications of various courses of action, and to let the policymaker decide among these choices.