Progressive Taxation as a Means to Equality of Condition and Poverty Alleviation

ABSTRACT.This paper explores the tax and transfer systems in the United States and argues that by being less progressive than its counterparts, the current tax system in the United States promotes inequality of condition, which not only hinders projects that could lead to poverty alleviation but also contributes to higher rates of poverty. It is further argued that redesigning the tax system to be more progressive - that is, to require higher incomes to pay proportionally higher taxes - is instrumental in promoting equality of condition and alleviating poverty.JEL codes: H21; H71; K34Keywords: tax system; transfer system; United States; OECD countries; income inequality; wealth inequality; equality of condition; poverty; poverty alleviationIf children are raised in common in the midst of equality [of condition]... let us not doubt that...they will learn to cherish one another as brothers, never to want anything but what the society wants.-Jean-Jacques Rousseau1. IntroductionAristotle maintained that we, qua human beings, are inherently social creatures because we depend on each other - we are interdependent. He argued that the "proof that the state is a creation of nature and prior to the individual is that the individual, when isolated, is not self-sufficing; and therefore he is like a part in relation to the whole" (Politics, Book I, Chapter II). Far from viewing relations of interdependence as a defect, Aristotle viewed them as the very relations that make us properly human. Only gods and beasts have no need for others, he wrote, and human beings are neither.Echoing Aristotle, the jurist Oliver Wendell Holmes Jr. is credited as saying that taxation is the price humans pay for a civilized society. This sentiment has been lost in contemporary America where relations of interdependence are viewed as inimical to individual liberty. Despite the fact that tax revenues pay for social goods, which allow individuals to live a good life, taxation has been compared to theft and even forced labor (cf. Nozick, 1974).The aim of this paper is twofold. The first is to show that, by being less progressive than its counterparts, the current tax system in the United States promotes inequality of condition, which not only hinders projects that could lead to poverty alleviation but also contributes to higher rates of poverty. The second aim is to suggest that redesigning the tax system to be more progressive - that is, to require higher incomes to pay proportionally higher taxes - is instrumental in promoting equality of condition and alleviating poverty. We shall begin with a brief analysis of the tax system in the United States.2. An (Brief) Analysis of the Tax System in the United StatesWhat makes the United States tax and transfer systems far less progressive than most of the countries in the Organization of Economic Cooperation and Development (OECD) is that it does far less to counteract pre-tax income inequality than the tax systems of most of the OECD countries (Greenstone and Looney, 2012). Over the last forty years, the United States federal tax system has undergone three significant changes, each of which contributed to its becoming less progressive (Piketty and Saez, 2007).The first change pertains to corporate taxes, which is one of the three major sources of federal revenues - the other two being individual and payroll taxes. Corporate income taxes as a fraction of gross domestic product (DGP) fell by half, from approximately 4 percent of GDP in the early 1960s to less than 2 percent of GDP in the early 2000s. There has been a steady decline in corporate tax rates since the 1950s, from 32 percent in 1953, accounting for 30 percent of federal tax revenues, to just over 7 percent in 2003, accounting for 10 percent of federal tax revenues. Currently, corporate income taxes account for a mere 8.9 percent of the federal revenue, making them the lowest of the three sources of federal revenues (Gravelle and Hungerford, 2008). …