Do higher marginal tax rates reduce inequality?
We have an ongoing interest in tax, its impact on good governance, growth, and eventually, investment opportunity. Investment Frontier has looked at ‘Tax Revenue as a % GDP’ and its usefulness as well as Withholding Tax.
In this post, we will be looking at certain assumptions that are made across the world with respect to marginal income tax rates. Specifically, whether or not higher progressive income tax rates, in general, result in less inequality in a country. To start with, we looked at marginal tax rates compared to countries’ GINI coefficient. The GINI coefficient is a key indicator of wealth inequality. For a detailed description of GINI, see here. GINI requires a lot of quantitative inputs and so it is available for a limited number of countries. As a result, we looked at all countries globally. The figure below very clearly indicates that there is no relationship between progressive tax systems and inequality in a society. Earlier we had shown that tax collection or the success of tax collection have little bearing on economic growth.
We then looked at the correlation between a change in tax rates over the last 25 years with a change in school enrollment amongst children (because literacy changes faster amongst children than in the wider population), a change in GDP per capita, and a change in life expectancy. The results are shown in the quartile chart below.
As illustrated above, there is no suggestion of a trend between marginal tax rates and any sort of improvement in the quality of life or economic growth from taxing high-income earners at a proportionately higher rate. There is a litany of research on both sides of the argument (for or against progressive taxation), but they more often than note are part of an agenda, rather than honest, objective analysis. We are not suggesting that there is no benefit to progressive taxation, but we do posit that this benefit is not shown in reducing inequality or in improving the quality of life of the citizens of a particular country.
By the same token, it is important to recognize that tax cuts independently also do not impact inequality or quality of life. Both rightist and leftist government passionately put forth both sides of this discussion, and in our opinion both are incorrect. The discussion of tax rates must be presented in a nuanced manner that includes reference to rates around the world; to demonstrate the clustering of tax rates, see the figure below.
Barring the Gulf countries and some Island States that have a 0 tax, there is a significant concentration of tax rates between 30% and 40%.
Provided below, are marginal tax rates by country and by year from 2000 to 2015. This data is exceptionally difficult to find, without paying a large fee, so we hope it is useful for you. As always, any questions, please let us know.