The Evolution of Tax Progressivity

As I have pointed out in a previous post, the U.S. has a fairly progressive system of taxation.  In fact it might be the most progressive system in the world as measured by the amount that it reduces the Gini-coefficient more than taxes in other countries.  There are countries that do more with transfers, but that is another matter.

How we got here is an interesting subject.  My opinion is that this is due to ideological entrenchment of a doctrine that changes in taxation ought to increase progressivity.  Increases in taxes can be targeted at the rich, but decreases in taxes cannot.

This may come as a surprise to casual observers of politics in the U.S.  We hear all the time that Ronald Reagan and George W. Bush implemented precisely this policy.  They were in office to give more money to the rich.  Taking less money from the rich is described as giving them money.  In fact, the tax cuts implemented under both presidents were across the board.  In neither case was a cut in the top marginal income tax rate implemented in isolation.  Other rates were cut as well.

People claim that these tax cuts provide disconfirming evidence for the contention that cuts in taxes can result in an increase in revenue.  While I believe that this hypothesis is probably false, this is not an adequate test.  The fact that across the board tax cuts lead to lower revenue tells you nothing about what would happen if you were to implement a reduction in the top marginal tax rate and do nothing else.  If we want to test the idea, we would want to lower the tax rate that would be most likely to be counter-productive, which would be the higher rate.  Under a progressive system of taxation, this means tax cuts that only directly benefit the rich.