taxation is the lifeblood of the government essay brainly

Taxation Is the Lifeblood of the State

The cliffhanger debate over whether or not to raise the federal government’s debt ceiling threw U.S. fiscal policy into brighter relief than it has been in recent memory.

Suddenly people were calling for significant cuts in government spending in the face of a rapidly growing national debt.

As often happens, calls for cuts in government spending were met by competing calls for higher taxes, especially on higher-income earners and businesses. They can afford to pay the extra taxes, we were told. And what’s more, higher taxes could actually help the economy.

In making this case, proponents of raising taxes pointed to the tax increases that came out of Washington under President Clinton in 1993. The U.S. economy, as measured by GDP growth, was strong in the years after those tax hikes while unemployment and inflation were relatively low. The argument now is that the 1993 tax increases did not inhibit the economic boom the country enjoyed in the last six or seven years of the twentieth century.

In April New York Times columnist Nicholas Kristof made this very argument. He wrote that while it’s true higher taxes in general “tend to reduce incentives,” this apparently “weak effect” is often overwhelmed by other factors. “Were Americans really lazier in the 1950s, when marginal tax rates peaked at more than 90 percent?” Kristof asked. “Are people in high-tax states like Massachusetts more lackadaisical than folks in a state like Florida that has no personal income tax at all?”

Like other observers, Kristof also contrasted the “golden period of high growth” after the Clinton tax hike with the “anemic economy” that followed George W. Bush’s tax cuts.

But do higher taxes really spur (or at least not inhibit) prosperity? Looking at the data from the 1990s, one might believe so. After all, the 1993 tax hikes were followed by years of strong economic performance. Post hoc ergo propter hoc (after this, therefore because of this), many might believe.

But not everyone agrees the data are quite so clear. The Heritage Foundation’s J. D. Foster, for example, believes the data show that the U.S. economy was already expanding when the Clinton tax increases took effect. If anything, he believes, those tax hikes slowed overall growth for several years until 1997, when the Republican-led Congress passed a series of tax cuts, including a reduction in the capital gains tax rate from 28 to 20 percent.

The “real acceleration in the economy began in 1997, when economic growth should have cooled,” Foster wrote. “This acceleration in growth coincided with a powerful pro-growth tax cut.”

Foster also authored a 2008 Heritage Foundation summary of several scholarly studies showing tax hikes corresponding with slower or negative economic growth. In theory higher taxes could encourage greater levels of private investment through lower borrowing costs—if government used the money to retire debt and reduced its competition for lendable funds. But this potential “silver lining” is overshadowed by the negative effects of higher taxes, he stated. However plausible theoretically, in practice the argument runs into trouble, not least from the fact that governments seldom save any of their revenue, Foster notes.

Still, the idea that the 1993 tax increases spurred economic growth will not die easily. For instance, some people argue that those tax hikes provided much needed confidence in the U.S. economy. As Kristof put it: “Tax increases can also send a message of prudence that stimulates economic growth.”

With this much disagreement it’s hard to know what is really the truth. And this is always the case when looking at the effects of any single economic policy in a vast and complex system. Indeed, so much is happening at any given time in a modern economy—central-bank policy, trade policy, military spending, technological innovation, war or peace, and more—it’s impossible to draw hard and fast conclusions from macroeconomic data alone.

The Austrian economist Ludwig von Mises made this point in his classic treatise, Human Action , in 1949. In discussing the role of historical data in economics, he wrote: “The champions of logically incompatible theories claim the same events as the proof that their point of view has been tested by experience. The truth is that the experience of a complex phenomenon—and there is no other experience in the realm of human action—can always be interpreted on the ground of various antithetic theories. . . . History cannot teach us any general rule, principle, or law.”

Stepping back, therefore, it may be worthwhile to consider fairly uncontroversial economic propositions, such as the law of demand or the law of marginal utility, when trying to determine the likely effects of a tax increase.

Basically, taxes alter relative prices. A tax on gasoline makes gasoline more expensive. A tax on whiskey makes whiskey more expensive. By the same token, a tax on income affects the “price” of leisure; that is, an income tax reduces the reward or “price” one receives for forgoing leisure in order to work. If you are willing to work for $10 an hour, you’re essentially “selling” your leisure time for that price. You might not be willing to sell that leisure time for a lower price. Thus an income tax can be expected, on the margin, to reduce the willingness of some people to work.

While all this is important, it’s probably more important to consider what happens to taxes after the government collects them. How government officials spend tax revenue can damage the economy as much as the tax itself can. That’s because taxes are used for any number of things that distort markets and waste resources, such as providing subsidies to favored industries or strengthening bureaucracies.

As a newspaper reporter I have frequent opportunities to witness government decisions to spend taxpayer dollars. Often an argument in favor of a particular spending program is that it will only add a few dollars to any single individual’s tax burden. Once a government program is in place, however, it’s extremely difficult to reverse it because government spending benefits particular individuals and they are quite motivated to maintain it. When budget cuts are proposed, government officials have effective ways of fighting back. For example, a proposed cut in education spending is nearly always said to be taking teachers out of classrooms, and a proposed cut in police spending is nearly always said to be taking neighborhood cops off the streets. The “fat” in education and law-enforcement spending may be elsewhere. But those are the items placed on the public chopping block by clever bureaucrats and politicians.

So the real problem with taxes and tax increases may be that they simply feed the beast—the political and less-efficient government sector—while shrinking the voluntary, more-efficient private sector. For anyone concerned about liberty this is reason enough to oppose higher taxes.

Arthur Foulkes writes for a daily newspaper in Indiana.

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10 things everyone should know about taxation

PhD Student, Law & Society, University of Victoria

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Canadian tax history has been fraught with controversies. One example is the racist head tax that was placed on Chinese migrants from 1883 until 1923, demonstrating that taxation can be both political and disciminatory .

Québec Premier François Legault triggered the most recent controversy when he proposed the idea of taxing unvaccinated citizens . Even though Legault dropped the ethically and legally questionable tax , the reaction to it illustrated just how controversial taxes can be be.

Read more: Sex, taxes & COVID-19: How sex workers navigated pandemic relief efforts

Ethically and legally questionable taxes aren’t limited to Canada . It’s an internationally recurring practice that affects people in different, and often unequitable, ways .

Ironically, society’s understanding of taxes could be part of the reason why so many questionable taxes are introduced in the first place. To many of us, taxes are just mandatory payments to government coffers . While this view is technically correct, it doesn’t help us understand why and how taxes are implemented in democratic pluralistic societies. Unfortunately, governments, courts and taxation experts usually overlook key aspects of taxes, leading to hazy definitions of taxes in court deliberations .

This can play a part in allowing ethically and legally questionable taxes to be imposed. It is much more difficult for unethical taxes to be put into place if citizens know what taxes are designed to do, and the correct way for taxes to be implemented. With that in mind, here are 10 things you should know about taxes.

Key aspects of taxation

Sustain society: The main goal of taxes is to levy resources for government expenditures that keep society up and running. Taxes contribute to everyday public services and social programs like health care , elderly benefits , public schooling , public transportation, fire protection and park maintenance . They can also bolster economic policies aiming to “ improve lives post-pandemic .”

Social viability: Taxes contribute to the organization of society . Although they are normally associated with contemporary states and governments, taxation is a social practice that is not limited to modern-day states. For example, the Indigenous Peoples of the Pacific Northwest Coast have long practised taxation prior to settler-colonialism. Their taxation systems function according to kinship values, organization, customs and institutions.

Social deliberation: Taxes are legitimized when they are created, detailed and applied according to the rules and institutions of society, and can be based on either cultural customs or legislation . Within western democratic societies, taxes are created through statutes approved by parliaments, and cannot be unilaterally imposed by governments. This means taxes require careful social deliberation before being put in place because they have far-reaching impacts on people’s lives and the legal responsibilities of the state.

Economics, wealth and resources: Despite their differences, most taxation theorists agree that taxes are justified because societies need to fund the programs and services that benefit everyone . Taxes depend on resources and wealth in order to fund expenditures, which means things like income generation, wealth increments, property ownership, natural resource exploitation, production, sales and purchases are all fair game for taxation .

Economic capacity: To adequately design and implement taxes, lawmakers must take personal economic capacity into account . Personal economic capacity refers to the amount of wealth and resources an individual has that can be levied to support society. It considers how taxes impact someone’s livelihood, fundamental needs and essential living standards. As such, it is the key element that determines the burden each person can fairly and reasonably bear in the context of taxation. When lawmakers do not consider the whole scope of economic capacity, taxes can cause harm and, in the case of the infamous “ tampon tax ,” further discrimination.

Non-confiscation: Taxes are not designed to be a means of wealth deprivation, although some taxes were associated with confiscation (the legal seizure of property by the government or other public authority) in the past. As a rule of thumb, ethically designed taxes consider people’s economic capacity and do not jeopardize their livelihood, fundamental needs and essential living standards . As such, confiscation is not caused by progressive and wealth taxes , as some opponents argue; instead, confiscation is the outcome of taxes that are implemented without consideration to people’s livelihood, fundamental needs, and essential living standards.

Unrequited payments: Taxes are not payments in exchange for specific services. People pay taxes to promote social viability through public or social goods, which benefit everyone. These goods include health care and are available to everyone regardless of their economic capacity . Consequently, taxes are not payments for the costs of specific services like passports , which are levied through fees.

Socially relevant goals: Taxes can also promote or disincentivize certain behaviours for social or political reasons. The main goal of these types of taxes is not to levy revenue, but to pursue “extra-fiscal” objectives like reducing pollution or preventing diabetes and obesity . These taxes are designed to contribute to collaborative social goals, like reducing the effects of climate change, without compromising people’s economic capacity .

Not punishments: Taxes are not designed to be punitive and, by definition, taxpayers are law-abiding people. Although taxes can certainly influence certain behaviours, as mentioned previously, they do not penalize them. Revenue can certainly be made from legally controversial activities — like the taxation of sex workers , whose work exists in a grey area — but taxes are not connected to illegal activities. Using taxes as punishment severely affects how people perceive taxes, so most states ensure taxes are not used as penalties for committing crimes or other offences. Otherwise, people will start to view taxes as charges that need to be dodged.

Substance matters: Some governments conveniently “forget” that taxes are defined by their substance , not their nomenclature. This substance consists of the previous nine aspects. A tax is a tax, even if it’s given an alternative name like “special charge” or “ad-hoc contribution,” as Brazil did in 2000 by implementing the “ contribution for intervention in the economy .” Likewise, a fine does not become a tax by simply calling it a “special tax.”

What experts forgot this time

While reactions to Legault’s proposed tax were torn , with some condemning it as a Charter violation and others seeing it as a viable health care solution, there are some clear conclusions that can be drawn. While most experts overlooked these 10 aspects when discussing Legault’s tax idea, some did concede that such a tax “would likely withstand legal challenges,” while pointing out it would “disproportionately impact low-income earners.”

However, they missed that taxes are not just a mandatory payment to government coffers. Taxes are more than that, and these 10 aspects suggest that Legault’s levy would not have been a tax at all, making his idea even more questionable. A tax on the unvaccinated would not have depended on anyone’s economic background, and would have wrongfully affected people’s economic capacity and punished taxpayers.

Although governments and experts can, and often do, overlook these 10 aspects, citizens should not. Adequate and fair tax implementation begins with these aspects. Keeping them in mind can help us hold governments accountable for the taxes that they try to implement, and can help prevent future unethical and legally questionable taxes.

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The Ethics of Taxation

Richard baron finds that philosophy need not be taxing..

In the Western world the proportion of the economy controlled by the state has grown enormously over the last century, and pressures on the state are set to rise as people live longer, meaning that tax will continue to rise for the great majority of the population. What are the rights and wrongs of asking so many people to pay so much?

To answer this we can ask several questions, including how much tax should be collected in total, which objectives of taxation are legitimate, and how individuals should conduct themselves as taxpayers. We will address these questions by using arguments from political philosophy, and the following three approaches to ethics:

• Utilitarianism , which tells us to aim for the greatest total happiness across the population. In the economic sphere, we can interpret ‘happiness’ as the satisfaction of our desires; and so utilitarianism as aiming for maximum satisfaction of desires.

• Deontology , which bases ethics on the idea of duty.

• Virtue ethics , which focus on the virtues we should have, and on what constitutes a virtuous life. A broad conception of the virtues must be used here, encompassing not only virtues such as honesty, but also virtues such as using one’s talents and leading a fulfilled life.

The Total Amount of Tax

For a utilitarian the most important economic goals are to ensure that goods and services are available to allow everyone to have a decent life, and to ensure that these resources are distributed widely enough for all or most people to enjoy them. A true utilitarian would only care about total satisfaction, not about the evenness of its distribution, but with taxation we’re discussing the distribution of resources. If each person has modest resources, that should generate more satisfaction in total than if the same total resources are concentrated in the hands of a few people. Taxation plus government spending are an obvious way to achieve redistribution to ensure that everybody gets something.

There is a certain tension here. Taxation and spending help to achieve wide resource distribution, but high rates of tax reduce investment and incentives, which makes it hard to generate sufficient total resources. Too much redistribution may thus mean too small a pie to share out. Utilitarians must therefore strike a balance. Economists, rather than philosophers, are the ones to advise them on how to do this balancing of interest to get the most productive result. This is not surprising. Utilitarianism merely lays down a computational rule. Utilitarians need experts from other disciplines to do the computations for them.

Unlike the utilitarian, the deontologist does not tell us to make computations. Instead, he or she lays down absolute duties. One common such duty is to respect other people’s property rights. This could be interpreted to mean that there should be no tax at all, because tax is the forcible transfer of property away from taxpayers. On the other hand, the duty to respect property rights could be used to argue that any social resources one used should be paid for, even if one did not ask for those resources to be provided. Thus in order not to be a thief, anyone who uses a public hospital, or even a public road, should make sure that he or she pays tax to cover their use. But it is difficult to make this argument watertight. Is it realistic to ask people to opt out of using public roads if they don’t want to pay tax? They would have to move to a wilderness somewhere. But why should they be made to do that, when they already own their homes? Deontology therefore does here what it often does. It offers arguments which pull in opposite directions, and leaves us completely uncertain about what to conclude.

Virtue ethics can be a bit more helpful on the question of the justice of taxation. Several virtues seem more likely to be exercised if tax rates are moderate than if they are very high. One should use one’s talents to the full. Financial incentives can encourage people to use their talents, but very high taxation dampens down those incentives by reducing take-home pay. Another virtue is charity, either in cash or in time. The more take-home pay people have, the more likely it is that they will feel able to afford charitable donations; and the higher peoples’ pay rates, the easier it will be for them to take time away from paid work to perform charity work or other forms of civic service, as school governors or magistrates for example. A third virtue is independence. It is good to earn what one needs rather than to depend on subsidies from others. Lower rates of taxation make independence more easily achievable.

Let us also turn to political arguments based on the fact that taxation is coercive. In Anarchy, State, and Utopia (1974), Robert Nozick argued that imposed taxation is a violation of our rights. Property is mainly shared out among us initially by a process of acquisitions a long time ago, and by exchanges since then. If the initial acquisitions and the subsequent exchanges were just, then the current distribution of property is just, and it would be unjust to interfere with that distribution by force. If people individually agree to pay for things like a police service, that’s fine; but the majority should not force the unwilling minority to contribute.

One of the most interesting challenges to this line of thought was given by Liam Murphy and Thomas Nagel in The Myth of Ownership: Taxes and Justice (2002). They say that we should not think in terms of a natural distribution of income and wealth, with a tax-levying state interfering with that distribution. Rather, the state is what gives the stability that allows high incomes. They point out that in a world without government there would be no security of property, no system of enforceable contracts, and so on. As a result, overall levels of wealth would be much lower than they actually are. It is not the case that the existing wealth would be distributed differently without a tax-levying state: the wealth would mostly not exist.

This seems to be true. But Murphy and Nagel’s argument is not enough to legitimise high levels of taxation and a big state. Suppose we had a minimal state, which provided security and a legal framework for business, but no more. So there would be no state benefits, and all schools, hospitals and roads would be private, profit-making, enterprises. The distribution of income and wealth in that minimal state might be very different from what it actually is, but the total income and wealth might not be so different. Thus Nozick could reply that this distribution, with a minimal state, should be assumed to be just. If so, any coercive interference by taxation to create a bigger state would violate peoples’ rights.

This response does not show that a big state would be wrong, but it does put the pressure back on those who advocate a big state to show that a big state is justified despite the coercion involved.

The Legitimate Objectives of Taxation

Tax can be used for all sorts of purposes, and it is often clear what ethicists of any particular kind would say about these purposes. We can start with the provision of law and order and the more extensive public services such as healthcare and education. Utilitarians will approve of taxation for these things because they allow more goods and services to be produced, and they also allow more non-materialistic desires to be satisfied. Virtue ethicists will approve because these services enhance people’s opportunities to use their talents and to lead flourishing lives.

When we turn to aid to the poor, utilitarians will approve because transferring resources from rich to poor increases the happiness of the poor more than it reduces the happiness of the rich. Virtue ethicists will approve because with redistribution the poor can be helped to flourish and develop virtues, and because looking after the less fortunate is itself a virtue (although voluntary charity may be a greater virtue than forced payment). And deontologists can recognize a duty to care for the poor. The greatest of all deontologists, Immanuel Kant, certainly believed in duty to the poor, although he did not have a tax-funded welfare state in mind as a response. However, none of this means that any kind of ethicist would favour unlimited provision of any of these good things through the tax system. As we have already seen, one has to consider the consequences of the overall level of taxation.

A more controversial objective is the promotion of equality, in the sense of equality of economic outcome (ie wealth) rather than of equality of opportunity. Taxation can very easily be used to make the distribution of incomes and wealth more equal, either by transferring cash from the rich to the poor, or by providing the same state services to everyone while taxing the rich more than the poor in order to pay for them. Greater equality may also be an accidental outcome of using the tax system to do other things. But it can also be a goal in itself. Is it legitimate to pursue equality through taxation?

There is a utilitarian argument for greater economic equality. If more equal societies are happier, more stable, have lower crime rates and so on, then a utilitarian would want to promote equality unless that interfered too much with other utilitarian objectives. We must let the sociologists tell us whether more equal societies do have those advantages.

One can also argue for equality on the basis of justice. The idea is that if there is no positive justification for people receiving unequal shares of the available resources, then they should receive equal shares, otherwise an injustice is done to those who get less than they would under an equal distribution.

To consider the merits of this argument we should start with the work of John Rawls, and in particular with his book A Theory of Justice (1971).

Rawls argued that social inequalities should be arranged so that the greatest benefit is gained by the people with the fewest advantages. However, he says an unequal system might actually benefit the disadvantaged more than an economically egalitarian one. For example, inequalities of income would be perfectly acceptable if they were a necessary result of there being incentives which encourage skilled people to work hard and entrepreneurial people to take risks, so long as the result was that those with the least income-earning potential were still made better off than they would otherwise have been. That looks sensible. Why not let the rich grow richer, if the poor are helped by their doing so? The poor will possibly even be grateful.

Not everyone accepts that inequalities like these would be just. For example, in his book Rescuing Justice and Equality (2008), Gerald Cohen argued that Rawls was far too permissive of inequality. He pointed out that we are free and conscious beings. However, the talented person who says that he or she will only work hard, and thereby benefit the whole economy, if enough money is offered, is acting like a vending machine. A vending machine will only give you what you want if you put the money in. But we are not vending machines. We can work out what we would do, given the financial incentives. Then we can decide to do it anyway, without the incentives.

Cohen said that we could work out what we would do in Rawls’s society, which has inequalities to give the right incentives to develop wealth, and then we could do the same things without the incentives – and without the inequality. Cohen argued that this would give us even greater justice than Rawls’ system would achieve. Cohen could not claim that this approach would be practical – the fact is that people do respond to financial incentives – but he could claim that it would be just. At least, he could claim that, if we accepted the basic premise that equality is generally more just than inequality. But should we accept that premise?

Rawls provides a key argument for equality. In his view, the way to establish what means of distribution of goods and resources is just, is to imagine what people would want if they were designing a society in which they themselves would live, but they had no idea of what family, talents or other circumstances they would have in that society. In that situation, they could expect nothing better than an average share, and would have no reason to accept as just anything substantially worse. They would therefore choose an egalitarian society, subject to the allowance for inequalities we have discussed.

But it is not at all clear that people would only accept inequalities which benefited the worst-off, as Rawls supposes. Suppose people had a choice between two societies, X and Y. In both societies, everyone would have at least a tolerable standard of living, and no-one would suffer abject poverty. In society X, the worst-off person would have an income of £15,000 a year, a few people would have incomes of £20,000, and the great majority would have incomes of £25,000. In society Y, the worst-off person would have an income of £14,000, a few people would have incomes of £19,000, and the great majority would have incomes of £27,000. Someone making a choice of which society they would prefer to be part of, but who did not know who they would be within it (Rawls’ ‘veil of ignorance’), could reasonably take a chance on being someone with the income of the majority, and so prefer society Y. Rawls was wrong to assume that he or she must rationally prefer society X.

The Conduct of Taxpayers

Most taxpayers pay their taxes, without fuss. But not all taxpayers act in this way. So lastly let’s look at whether two other forms of behaviour can be ethically acceptable: tax evasion, and tax avoidance.

Tax evasion involves knowingly mis-reporting the facts: for example, declaring an income of £50,000 when the true figure is £60,000; or declaring that an asset is owned by one company in a group when it’s really owned by another, so paying less tax.

It would be very hard to give an ethical justification for tax evasion. One way to try to do so would be to argue that the state, in imposing taxation, engaged in theft, and that in order to prevent the theft one could lie to the state, just as one could lie to a thief. This argument would have some plausibility in the context of a regime that was imposed, rather than one democratically chosen in free elections. That is, it is possible to see a regime that is not freely elected as merely a gang of bandits, even if they are sometimes benevolent bandits. But there are many countries in which governments are freely elected, and therefore their taxation demands may be considered legitimate.

Unlike tax evasion, tax avoidance does not involve concealing information or lying. Instead, it involves structuring business transactions to ensure that less tax is payable than one might otherwise expect. The most ethically challenging examples in this area are to be found in the complex schemes used by some groups involving networks of companies and partnerships in several countries. Tax avoidance works through compliance with the precise letter of the law, not through breaking the law. That is to say, tax savings achieved may be accord with the words of the law, but it is clear that if Parliament or other legislative bodies in other countries had thought about such schemes, it would have passed different laws in order to defeat them.

A utilitarian, concerned with aggregate welfare, might be quite relaxed about tax avoidance. After all, when tax is avoided, wealth is not destroyed: it is merely kept in the private sector instead of being transferred to the public sector. The main utilitarian concern would probably be that it would result in an unintended distribution of the tax burden, as some of the burden would be shifted from the rich onto people on modest incomes who cannot afford clever tax lawyers. That would reduce their satisfaction more than it would increase the satisfaction of the better-off people who have reduced their tax burdens. But that loss to the poor might not happen. For example, where shares in companies are held by pension funds, the pensions of ordinary people can be boosted when those companies avoid tax. A virtue ethicist would be likely to view tax avoidance with disfavour. It is, after all, hardly virtuous to exploit rules knowing that one is exploiting them in unintended ways to redistribute the disadvantage away from oneself. A deontologist would not positively favour tax avoidance, but might not condemn it either. Deontologists can easily argue for a duty to obey the law: yet obeying the law is something the tax avoider takes care to do, in his own special way.

© Richard Baron 2012

Richard Baron is a philosopher and a tax policy adviser. His website is www.rbphilo.com .

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Tax in the time of Corona

by: Karen S. Baquiran

As of the time of this writing, the recorded number of people infected with the Novel Corona Virus (COVID-19) in the Philippines has reached 217, with 17 deaths and 8 recoveries. Fear, panic, and anxiety has taken over the country as government leaders try to come up with solutions to contain the deadly virus. The entire Luzon has been placed under enhanced community quarantine while local cities have initiated lockdowns of their own. Consequently, the closure of schools, public transport, and businesses, except those that provide basic goods and necessities, has been mandated. Experts forewarn that the spread of the virus is inevitable and there are approximations that it would take weeks, if not months, for the dust to settle. In these uncertain times, the Bureau of Internal Revenue (BIR) has, in definite terms, heeded our nation’s call to extend the tax filing deadline.

Previously, the BIR issued Revenue Memorandum Circular (RMC) No. 25-2020 stating that “the filing of the Annual Income Tax Return (AITR) for Calendar Year 2019 shall not be extended. Hence, its filing shall still be done on or before April 15, 2020.” The BIR wrote the text in bold letters perhaps to further stress the point and remove all doubts of any possible extension. To limit the exposure of persons, however, the use of electronic filing facilities (e.g. Electronic Filing and Payment System (EFPS), eBIRForm Facility, etc.) was encouraged.

Nevertheless, the imposition of the enhanced community quarantine and lockdown would make it difficult for taxpayers to prepare and file income tax returns. There was an appeal from the general public for the BIR to reconsider and extend the annual filing deadline. After all, Section 53 of the Tax Code allows the Commissioner of the BIR, in meritorious cases, to grant a reasonable extension of time to file income tax or final adjustment returns.

Can COVID-19 be considered a meritorious case? It seems so, based on the Department of Finance’s (DOF) announcement on 19 March 2020 and BIR RMC No. 28-2020. Particularly, the DOF announced that the BIR has extended the filing of the annual income tax returns up to 15 May 2020. This was followed shortly by the release of BIR RMC No. 28-2020, which amends RMC No. 25-2020 and provides an extension of time up to 15 May 2020 within which the taxpayers can file and pay their income tax returns without the imposition of penalties. According to the DOF, the emergency measure is intended to offer relief to Filipino taxpayers whose tax preparation, filing and payment obligations will be affected by skeleton workforce arrangements and enhanced community quarantine rules. In the same statement, however, the DOF emphasized the effect of such extension to our tax collection targets so that those who can file within the original 15 April 2020 deadline are still urged to do so.

The author notes that this will not be the first time that an extension in the filing of tax returns is granted. For instance, in 2003, the BIR, through Revenue Regulation (RR) No. 15-03, granted taxpayers with accounting period ending 31 December 2002, an extension of time to file their annual income tax returns in view of the then perceived systems failure of the eFPS as well as the reduced bank work force owing to the fact that 15 April 2003 falls within the Holy week of the said  year. In 2001, moreover, the BIR issued RR No. 04-01, which granted taxpayers with accounting period ending 31 December 2000, an extension of time within which to file their income tax returns. The extension was granted to compensate for the lost time and opportunity of the taxpayers to file their income tax returns due to the close of business operations of Authorized Agent Banks during the Lenten break.

Currently, there is no question that a deadly virus outbreak is a serious and drastic circumstance. However, the collection of taxes is similarly a vital function of government and delays will necessarily impede the provision of public services. The lifeblood doctrine, which has often been invoked to support the imposition of taxes, finds relevance now more than ever. 

Essentially, the lifeblood doctrine emphasizes that taxation is indispensable to the existence of government such that the government needs the contribution of its citizens in order to function and operate. This doctrine is often quoted in several rulings of the BIR and court cases. In the case of Commissioner of Internal Revenue vs. Manila Bankers’ Life Insurance (G.R. No. 169103, dated 16 March 2011), the Supreme Court had the occasion to reiterate that “it is through taxes that government agencies are able to operate and with which the State executes its functions for the welfare of the constituents.” The Supreme Court further explained in the case of National Power Corp. vs. City of Cabanatuan (G.R. No. 149110, dated 09 April 2003), that “the theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.”

At this time where public funds are necessary not only to sustain economic activity, but also to ensure future stability and meet the demands for “social protection and emergency health measures meant to effectively combat COVID-19”, the role of the BIR as tax collector becomes more germane. The BIR must balance commiserating with the plight of taxpayers with guarding their sacred mandate to guarantee that collections are made on time. Although extensions may bring great relief to taxpayers, it also comes with a heavy price tag - according to the DOF, “an unintended result of the deadline extension is an estimated delay and shortfall in tax collections of around P145 billion, which may have to be covered by additional borrowings by the national government.” Hence, the appeal of the government to file within the deadline or earlier for those who can do so.

In furtherance of this balancing effort between raising funds and accommodating concerns arising from COVID-19, the BIR also waived both the penalties of taxpayers who will be filing their annual income tax returns within the extended period as well as the venue requirement. RMC No. 28-2020 provides that taxpayers may file and pay their taxes to any authorized agent bank nearest to their location or any revenue collection officer under the revenue district office.

Undeniably, COVID-19 is causing the filing of tax returns to be more challenging this year. Although the government is trying to soften its economic impact, taxpayers would still have to prepare themselves not only against the virus but also its accompanying side effects. The Department of Health said that the spread of the virus is inevitable as it is no longer a matter of “if” but “when.” On a positive note, the “if” and “when” concerns regarding the extension of the filing and payment of income tax returns have been finally answered.

Karen S. Baquiran is a Supervisor from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected] or [email protected]

© 2024 R.G. Manabat & Co., a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

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Taxes are the most important source of government revenue. Who is paying how much and how do tax systems differ?

By: Esteban Ortiz-Ospina and Max Roser

This page was first published in September 2016 and last revised in March 2023.

Taxation is, by and large, the most important source of government revenue in nearly all countries.

We begin this topic page by providing an overview of historical changes in taxation patterns, and then move on to an analysis of available data from the last couple of decades, discussing trends and patterns in taxation around the world.

From a historical perspective, the growth of governments and the extent to which they are able to collect revenues from their citizens is a striking economic feature of the last two centuries. The available long-run data shows that in the process of development, states have increased the levels of taxation, while at the same time changing the patterns of taxation, mainly by providing an increasing emphasis on broader tax bases.

Taxation patterns around the world today reveal large cross-country differences, especially between developed and developing countries. In particular, developed countries today collect a much larger share of their national output in taxes than do developing countries; and they tend to rely more on income taxation to do so. Developing countries, in contrast, rely more heavily on trade taxes, as well as taxes on consumption.

Moreover, the data shows that developed countries actually collect much higher tax revenue than developing countries despite comparable statutory taxation rates, even after controlling for underlying differences in economic activity. This suggests that cross-country heterogeneity in fiscal capacity is largely determined by differences in compliance and efficiency of tax collection mechanisms. Both of these factors seem to be affected by the strength of political institutions.

In the last part of this topic page, we provide an overview of empirical evidence regarding the equity and efficiency implications of taxation. In particular, we show that taxation does have a powerful redistributive effect, but it is important to consider how taxation also affects the behavior of individuals, by changing economic incentives.

Related topics

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State Capacity

Do governments worldwide have the ability to implement their policies? How is this changing over time? Explore research and data on state capacity.

How common is corruption? What impact does it have? And what can be done to reduce it?

See all interactive charts on taxation ↓

History of taxation

Taxes started growing in early-industrialized countries after the first world war.

The visualization shows the evolution of tax revenues, as a share of national income, for a selection of early-industrialized countries.

As we can see, until 1920 tax revenues were low across all these countries. Indeed, until 1910 less than 10% of national income was collected by these governments through taxation – just enough for them to fulfill basic functions, such as maintaining order and enforcing property rights.

After the First World War, however, taxation started growing considerably. In the period 1920-1980 taxation as a share of national income increased drastically, more than doubling across all countries in the chart. These increases in taxation went together with more government expenditure on public services, particularly education and healthcare .

After 1980, tax revenues started stabilizing, albeit with marked differences in levels for each country. Today these differences remain significant.

Income taxation played a fundamental role in the historical expansion of tax revenues

The growth of tax revenues that took place in early-industrialized countries after the First World War was largely supported by the extension of income taxes. This required states to build tax administration systems and implement tax withholding at source, in order to effectively raise compliance.

The visualization from Besley and Persson (2013) 1 tracks a group of 18 countries, in order to show how different taxation instruments became increasingly more common during the 20th century.

The vertical axis shows the relative frequency of taxation instruments within the sample of countries, and the horizontal axis shows time. 2 The red line plots the share of countries with income taxation, the blue line plots the share with income-tax withholding, and the green line plots the share with value-added taxation.

As we can see, income taxes began appearing around 1850, with direct withholding following about 25 years later; and VAT again somewhat later. By 1950 all countries in the sample had already both income taxation and direct withholding.

In this interactive chart , you can see in detail how VAT, specifically, has spread around the world in the last few decades.

In the 20th century, European countries expanded revenues from direct taxation faster than other sources of government revenue

As pointed out above, early-industrialized countries increased tax revenues after the First World War specifically by increasing direct forms of taxation. Here we provide further evidence of this and show how the taxation of incomes became increasingly important to collect revenues in these countries, also in relation to other sources of revenue.

The graph shows the proportion of total government revenue that is accounted for by income taxation. The data plotted corresponds to historical estimates from Flora (1983) 4 up until 1975, and more recent estimates, starting 1980, from the International Centre for Tax and Development .

As we can see, the relative importance of income tax within government budgets fluctuates with time, but there is a clear positive trend in all cases.

Revenue structure and government structure in the US are historically interdependent

The experience of government expansion in the US shows that there is a link between tax revenues, and government structure more generally.

As Wallis (2000) points out, the US has passed through three distinct systems of government finance in the last two centuries. 5 In the first financial system, lasting from 1790 until about 1842, state governments played an important role in raising government revenue, mainly by generating 'asset income' through activities such as the sale of land. In the second financial system, starting around 1840, local governments became more important, contributing an increasing share of government revenue from property taxes. In the third system, starting with the Great Depression, the federal government became more important, generating increasingly larger revenues through the collection of income taxes.

The visualization shows how this transition took place. It provides details regarding the evolution of government revenues by level of government, expressed as a share of national income.

As can be seen in the chart, the implementation of new forms of taxation during the 20th century in the US was associated with underlying changes in the structure of the government. By displaying relative values in ‘Settings’, you can see how the share of national revenues rose sharply after the Second World War. This is when income tax revenues started expanding.

In the process of development, middle-income countries have increased tax revenues

The evidence that we have discussed so far is mainly from high-income countries. However, the available long-run data from Latin America suggests that middle-income countries have also expanded tax revenues in the process of development – albeit later, and with some differences in the relative importance of specific tax instruments.

The visualization, using data from Arroyo-Abad and Lindert (2016) 6 , shows the composition of tax revenues for Colombia. These estimates correspond to central government revenues and are expressed as a share of national income – specifically GDP. Comparable data, from the same source, is also available for Peru; you can see the corresponding figures by clicking on ‘Edit countries' and selecting Peru.

As we can see, tax revenues started growing noticeably in the 1960s, mainly through the collection of consumption taxes. By displaying relative values in ‘Settings’, you can see the relative importance of the different tax instruments.

As can be seen, income taxation became an important source of revenue in the second half of the 20th century, although consumption taxation grew faster than income taxation throughout this period.

Taxation today

What are the main instruments used by governments to collect revenue.

In the preceding section, we discussed the historical evolution of government revenues and provided evidence of the important role that taxes, specifically, played in the expansion of governments. But what is the full menu of instruments that governments have to collect revenues?

Roughly speaking, governments finance policy from taxes, grants (typically in the form of 'development assistance' transfers), and debt (more precisely budget deficits, or reductions of budget surpluses).

The diagram, from Prichard et al. (2014) 7 , provides a conceptual classification of revenues other than debt.

As we can see, these revenues include grants, direct taxes (such as taxes on income, profits, property, etc.), indirect taxes (such as taxes on consumption, sales, trade, etc.), and social contributions.

How much tax revenue do countries collect today?

The visualization shows a map of total tax revenues, expressed as a share of GDP.

As we can see from the most recent data, at one extreme of the spectrum we have countries where total tax revenues are higher than 40%. At the other extreme, we have countries where taxes account for only a few percent of national income.

More generally, this map shows that there is a clear correlation between GDP and tax revenues – richer countries tend to collect through taxes a much larger share of their domestic production. This is a remark that we address in more detail in the following sections.

The next visualization uses the same data but plots the evolution of tax revenues for individual countries.

The time series shows that most high-income countries have had relatively stable levels of tax revenues in the last decade; while trends and patterns are less clear across the developing world. In some cases, tax revenues have been going up consistently.

In any case, differences today remain large and there is no clear evidence of global convergence. In many developing countries levels are very low and trends have not been persistently going up by a significant margin.

How do developing and developed countries compare in terms of tax revenue?

The table, from Jha (2008) 8 , shows differences in tax revenues as a share of GDP for various country groups. The table pools countries within groups, across two periods of time: 1990-1995 and 1996-2002. For each time-group pool of countries, the author ranks countries by tax revenue as a share of national income and reports the level for the country in the middle (i.e. the median tax revenue within that time-group pool). This gives us an idea of the 'typical' country in that region, at that point in time.

As we can see, developed countries collect almost twice as much as developing countries in tax revenue. And developing countries, in turn, collect almost half as much as transition economies. Also, we can see that developed countries had little change in tax-to-GDP ratios in the second half of the 20th century, whereas in developing countries there seems to be a broad negative trend.

Which forms of taxation dominate revenues in different world regions?

We have already discussed the fact that levels of taxation differ greatly across world regions – both in levels and trends. Now we focus on differences in the composition of tax revenues.

The visualization presents a breakdown of tax revenue sources, comparing figures from 1986 and 1996. The estimates are provided for a selection of country groups (you can switch country groups by clicking on the option 'change country group'), and are expressed as a share of GDP. The data comes from Todaro and Smith (2014) 9 , and includes direct taxes (corporate and income taxes), as well as indirect taxes (general, commodity, and excise taxes) and social security contributions.

Although these estimates are somewhat dated, they do provide a rough idea of taxation patterns by world regions. As it can be seen, developing countries depend significantly on indirect taxes, particularly taxes on trade and consumption. This can be contrasted with the case of OECD countries, where direct taxation – especially personal income taxation – is comparatively more important.

It is also worth noting the important role of social security revenues in advanced economies: at 10% of GDP in 1996, social security revenues are almost 10 times larger than in developing countries.

More recent data suggests that direct taxation, and specifically income taxation, remains more important in developed countries than in developing countries.

The next visualization plots total revenue from taxes on income and profits (horizontal axis) against revenue from taxes on goods and services (vertical axis), both expressed as a share of GDP.

As we can see, there is a positive correlation on the aggregate, and European countries are consistently located further towards the top right.

It can also be checked that most countries in the OECD are close, or below a hypothetical line with a slope equal to one (i.e. feature higher income tax revenues than commodity tax revenues).

Taxation of incomes

How have income tax revenues evolved around the world.

The next visualization provides an overview of revenues from income taxation (specifically taxes on incomes, profits, and capital gains) over recent decades. The estimates correspond to direct taxation of individuals and corporations and are expressed as a share of GDP.

The data shows large and persistent cross-country heterogeneity, even within relatively similar countries, such as those in the OECD.

In comparison to developing countries, the data also shows that in developed countries the direct taxation of corporations and individuals accounts for a larger share of national production. And this has been consistently the case throughout the last couple of decades.

As noted before, an important part of government revenue in developed countries comes from direct forms of taxation, so it is not surprising that the evolution of income taxation tracks closely the stable evolution of tax revenues that we discuss above.

Marginal income tax rates from a historical perspective

One important feature of income tax systems is the statutory rate of taxation that applies to the highest bracket of income. This measure, usually known as the 'top marginal rate of taxation', corresponds to the tax rate that applies to the 'last dollar' of income earned by the rich.

The chart here gives us an idea of how income taxation has changed in rich countries, by plotting trends in top marginal rates across France, Germany, the UK, the US, and Japan, over more than the last century.

As we can see, at the turn of the 20th century the top earners in these countries faced almost zero taxation on the last part of their incomes; but this changed drastically around 1910-1930, when high top marginal rates were introduced. Interestingly, however, this lasted only until about 1980, when again all countries substantially reduced rates. Today the levels are about half of what they used to be at the highest point.

How have statutory tax rates for the rich evolved in the last few decades?

The chart here shows the sharp trend of reducing top marginal tax rates after the 1980s, as a global phenomenon expanding both developed and developing countries.

The interpretation of this graph often leads to confusion. A common mistake is to interpret the top marginal tax rate as the effective rate of taxation applied to the rich. This is incorrect because the top marginal rate applies (as the 'marginal' name suggests) only to the last portion of income earned by the rich. By implication, lower marginal rates at the top do not directly imply lower economic incidence of taxation for the rich.

Having said that, additional evidence does seem to suggest that the reduction of top marginal income tax rates has been one of the ingredients contributing to lower effective tax rates for the rich. We discuss this additional evidence in the next section.

How do marginal rates of taxation compare to average rates of taxation?

The marginal rate of taxation is defined as the rate of tax that is applied to the ‘last dollar’ added to the taxable income. This means that marginal rates apply only to the portion of taxable income that exceeds the lower income threshold for that marginal rate.

In contrast, the average, or effective rate of taxation is defined as the ratio of total taxes paid by total income earned – that is, the share of income that is paid in income taxes.

The distinction between these two concepts is important because for many people, a portion of their income is taxed at one rate, and the rest is taxed at another rate. In the US, for example, if a married couple earns $40,000 a year, they pay federal income taxes at a rate of 10% on the first $18,500 or so, and at a rate of 15% on the rest. Hence, while the marginal rate applied to the last dollar earned is 15%, the effective income tax rate is lower.

Using the US federal income tax schedule, the visualization shows the marginal and average rates for the income of married couples (filing jointly). These figures use estimated tax brackets for 2016 from the Tax Foundation .

This visualization shows that average and marginal income tax rates are clearly different. Specifically, while both average and marginal rates are increasing, average rates are smoother and generally lower.

A similar chart showing marginal and average rates for the income of single individuals – as opposed to married couples filing jointly – can be found here .

Taxation of consumption

How is consumption taxed.

We have already outlined above the main instruments used by governments to collect revenue. Here we want to provide more detail regarding different forms of 'commodity taxation', in particular consumption taxes.

In the OECD nomenclature, consumption taxes (taxes on production, sale, transfer, leasing, and delivery of goods and rendering of services) include two sub-categories: general taxes on goods and services (taxes on general consumption including VAT, sales taxes, and other general taxes on goods and services) as well as taxes on specific goods and services consisting primarily of excise taxes (as well as customs and import duties and taxes on specific services, such as taxes on insurance premiums and financial services). For more details see OECD (2016). 10

The key distinction between VAT and excise taxes is that VAT is paid by consumers, while excise taxes are paid by producers. In other words, they have a different statutory burden. As we discuss below, the statutory burden of a tax does not necessarily describe who really bears the economic burden of the tax .

How has the taxation of goods and services evolved around the world?

The visualization provides an overview of revenues from the taxation of goods and services over recent decades. The estimates account for sales taxes, value-added taxes, and excise duties; and are expressed as a share of GDP.

The data shows some cross-country heterogeneity although, relative to revenue from income taxation, heterogeneity in commodity taxation is smaller, especially among high-income countries.

How important are different forms of commodity taxation in OECD countries?

We have already noted that taxes on goods and services tend to be less important in high-income countries than in low-income countries. Here we want to focus on the relative importance of different forms of commodity taxation.

The visualization plots the evolution of VAT and excise taxes in the OECD. The figures correspond to OECD averages and all values are expressed as a percentage of total taxation. These figures give us an idea of the evolution of the importance of different forms of commodity taxation in OECD countries.

As we can see, the composition of consumption taxes has fundamentally changed in the OECD over the last few decades: the weight of consumption taxes has been stable because the substantially increased importance of VAT has been effectively balanced by a reduction in the importance of other taxes on specific goods and services, the bulk of which are excise taxes.

How do statutory consumption tax rates compare across countries?

The next visualization shows how value-added tax rates compare between world regions. These figures come from the World Development Report (2005) , and include corporate tax rates as a benchmark.

This visualization shows that value-added tax rates are similar in developed and developing countries, which suggests that the differences we observe in revenue between regions are likely due to differences in compliance. In fact, this is not only specific to commodity taxation – Besley and Persson (2013) 1 show that developed countries tend to raise much more income-tax revenue than developing countries with comparable statutory rates, which suggests that the tax base in low-income countries is more strongly affected by compliance difficulties.

In summary, the evidence suggests that fiscal capacity (i.e. the extent to which countries can extract revenues through taxation at any given level of economic activity) is considerably less developed in poor countries.

How common are VAT exceptions?

Most VAT systems around the world adopt multi-rate systems with one or more reduced rates applying to particular goods. The chart, from OECD-KIPF (2014), 11 shows the goods and services that are most commonly subject to reduced VAT rates in OECD countries.

As can be seen, in most countries that use VAT exceptions, reduced rates tend to apply to basic products in which low-income households spend a larger share of their income (such as food); as well as to products with perceived positive social spillovers (such as newspapers, books and medicines).

Many countries also use reduced rates for other reasons. From this chart, it seems like providing support to specific industries, such as tourism, is another important factor considered by governments.

Recent trends in the incidence of taxation

Taxes affect market prices, so the statutory burden of a tax does not describe who really bears the tax.

Taxes affect economic interactions by changing the relative prices of goods and services in the economy. This implies that to assess who bears the burden of a tax, it is not sufficient to look at statutory tax rates. For example, if a tax is imposed on producers, in a competitive market they will raise prices to some extent to offset this tax burden – so the producers’ income will not fall by the full amount of the tax. A similar argument can be made if the tax is levied on consumers, since in a market economy the tax will lower demand, and this will have a consequence also for producers.

The key point is that, in order to analyze the economic incidence of taxation in a market economy, we need to look beyond statutory tax rates. Below we provide concrete examples of how economists try to estimate the economic incidence of taxation.

How much taxes do rich households pay in the US?

In the US, the Congressional Budget Office (CBO) produces estimates of the incidence of taxation across the population. To do this, they make the following assumptions: (i) Taxes on earnings are borne by workers; (ii) Taxes on individual income are borne by the households that pay them; (iii) Taxes on corporate income are borne by individuals in proportion to their capital income; (iv) Taxes on consumption are borne by individuals in proportion to their consumption. 12

Based on these assumptions, the CBO calculates total tax contributions as a share of pre-tax income for different segments of the pre-tax income distribution. 13 These estimates, often referred to as 'average tax rates', can be interpreted as the effective rates of taxation that apply to individuals with different incomes, after accounting for government transfers (specifically cash payments and in-kind benefits from social insurance and other government assistance programs).

The visualization, plotting CBO estimates of average tax rates, shows that the federal tax system in the US has been generally progressive: those located higher in the ranking of incomes, pay a higher share of their income in taxes.

Across time, we can also see that progressivity has not been constant – the period 1980-1990 saw important reductions in tax rates for the rich, without comparable reductions for the poor.

The hike in tax rates towards the end corresponds primarily to significant changes in tax rules in 2012. Up until that point, and since around 1995, tax rates for the richest 1% went down every year (although they also went down for the lower-income groups in the same period).

How progressive is taxation at the top of the income distribution in developed countries?

The visualization above shows that, according to the estimates from the Congressional Budget Office , richer individuals in the US generally tend to bear a larger burden of taxation than the poor. Here we examine whether this is also true within the top of the income distribution – that is, whether the 'ultra-rich' shoulder a larger tax burden than the 'rich'.

The next visualization, from Piketty and Saez (2007) 15 shows estimated average tax rates in France, the US, and the UK, at two points in time: 1970 and 2005. Notice that these are average rates (i.e. total tax contributions as a share of pre-tax income), which are different from marginal tax rates .

Displayed are rates for the bottom 90% of the income distribution, as well as higher percentiles. Again, we can see in these estimates that the systems in question are progressive – increasingly higher percentiles in the income distribution pay increasingly higher effective rates of taxation. However, the lines are much flatter in 2005, which shows that the systems have become less progressive at the top: the average share of income paid by those at the very top of the income distribution has dropped substantially since 1970. This is important because, as the authors of the figure point out, over the same period pre-tax income inequality grew significantly: a few very rich individuals at the very top are accumulating an increasingly large share of national incomes.

An important point that should be kept in mind is that these estimates are not directly comparable to those from the Congressional Budget Office discussed above, because they do not take into account government transfers, and rely on different methodological assumptions – for example, they do not consider excise taxes (but they do consider estate taxes). For more details see Piketty and Saez (2007). 15

The drivers of tax revenues

Rising gdp is associated with rising tax revenues.

We have already pointed out that rich countries tend to collect much higher tax revenues than poor countries. The visualization provides further evidence of the extent of this correlation.

The vertical axis measures tax revenues as a share of GDP, while the horizontal axis measures GDP per capita (after accounting for differences in purchasing power across countries). The horizontal axis is expressed by default in a logarithmic scale, so that the correlation is easier to appreciate – you can change to a linear scale by clicking the ‘Settings' button.

We can see that there is a strong positive correlation: richer countries tend to have higher tax revenues as a share of their GDP. And this is also true within world regions (represented here with different colors).

Early-industrialized countries became better at collecting revenue as they developed

We argued above that the efficiency of tax collection is a strong predictor of cross-country differences in tax revenues – rich countries have more capacity to extract revenues. As historical data shows, this capacity was largely possible because, throughout the 19th century and up until the first half of the 20th century, these countries found increasingly cheaper ways to collect taxes.

The visualization, from Lindert (2012) 17 , shows that the US and the UK saw steep declines in the administrative cost shares of indirect tax collection across the 19th century and the early 20th. As we can see, the cost of collections dropped, from over 4.5% of the amounts collected in the mid-19th century to 2% since the middle of the 20th century.

Tax collection relates to the strength of political institutions

Cross-country differences in tax revenues are linked to the capacity of countries to implement efficient tax collection systems. Here we provide evidence suggesting that political factors – such as the extent of institutionalized constraints on the decision-making powers of policymakers – help shape the level and evolution of the fiscal capacity of countries.

The chart, from Besley and Persson (2013) 1 , plots the cross-country relationship between political institutions and tax revenues. The authors approximate the strength of political institutions by calculating the proportion of years since independence (or since 1800 if independence is earlier) that a country had strong constraints on the executive. Having 'strong constraints on the executive', in turn, is measured with data from the Polity IV database . In essence, this variable aims to capture the extent to which accountability groups impose institutionalized constraints on the decision-making powers of policymakers.

The scatter plot controls for baseline differences in GDP – that is, what we observe is the correlation between tax revenues and political institutions conditional on GDP levels. As we can see, countries with strong executive constraints collect higher tax revenues, when income per capita is held constant, than do countries with weak executive constraints.

Some studies suggest that, under weak accountability, countries may not only have generally weak taxation systems but may also be subject to ‘political budget cycles' whereby tax collection declines prior to elections, as politicians seek to secure short-term political support. 18

Aid correlates negatively with tax revenue, but the link does not seem to be causal

A large body of academic literature has studied the relationship between revenue from development assistance ('foreign aid') and revenue from taxation. The hypothesis supporting this strand of literature is straightforward: foreign assistance may 'crowd out' domestic tax revenues, as it reduces the incentives for policy-makers to pursue politically costly tax collection.

This hypothesis seems to be supported by raw correlations. The plot, from Benedek et al. (2014) 19 , shows the evolution of tax revenues and foreign aid (Overseas Development Assistance – ODA). It shows a broad negative association: between 1980 and 1995, when foreign aid as a share of GDP was increasing, average tax revenue in relation to GDP decreased slightly. Post-1995, a decline in the share of total net ODA to GDP was accompanied by higher tax revenues as a percentage of GDP.

This relationship cannot be interpreted causally, as there are many factors that simultaneously drive ODA flows and tax revenues. More complex econometric studies that try to account for further sources of bias find that there is no consistently significant relationship between aid and tax collection. 20

The consequences of taxation

Taxation is an important instrument for reducing inequality.

One way to gauge the extent to which taxation redistributes resources between individuals in a country is by looking at how the distribution of incomes change before and after taxes. The visualization does this, showing the reduction of inequality that different OECD countries achieve through taxes and transfers.

The estimates correspond to the percentage point reduction in inequality, as measured by changes in the Gini coefficients of income, before and after taxes and transfers. In a nutshell, income 'before taxes' corresponds to what is usually known as market income (wages and salaries, self-employment income, capital and property income); while income after taxes and transfers corresponds to disposable income (market income, plus social security, cash transfers and private transfers, minus income taxes).

The data shows that across the countries covered, taxes and transfers lower income inequality by around one-third on average (equivalent to around 0.15 Gini points). Yet cross-country differences are substantial.

Generally speaking, countries that achieve the largest redistribution through taxes and transfers tend to be those with the lowest after-tax inequality.

While informative for the purpose of cross-country comparisons, these results have to be interpreted carefully, since the before-tax distribution of incomes is already the result of choices made by individuals who take taxes and transfers into consideration. Put simply, the before-tax distributions of incomes are likely to be different to the actual distributions of incomes that would be in place if there were no taxes or transfers. This can be clearly explained in the context of pensions: individuals receiving state pensions appear in the data as poor before transfers; but many of them would of course have private pensions if they lived in a country without state transfers.

The extent to which taxes affect behavior is discussed in more detail next.

Taxation can lead to efficiency losses

In market economies, consumers and producers change their behavior in response to taxes. For example, if a taxed good has a substitute that is not taxed, some consumers will shift to the substitute to avoid the tax. These changes in behavior can lead to inefficiencies. For example, high tax rates may discourage labor supply; and in the case of very rich individuals, they may even induce migration of talent to countries where the tax burden is lower. In both cases, the 'size of the pie' would be reduced by taxation. So how large are these behavioral responses?

Using data from the European football market, Kleven et al (2013) 22 find evidence of strong mobility responses to taxation for 'superstars'. The scatterplots support this.

The two plots correspond to different time periods. The vertical axis represents the fraction of all top-league professional football players who are foreign nationals in the country where they play, and the horizontal axis shows the average top earnings tax rate for foreign players in that country.

As we can see, in the period 1985-1995 there was no correlation between migration and tax rates; yet in the period 1996-2008, after the Bosman ruling on free mobility was enacted, the correlation became strongly negative: the countries with higher top earnings tax rates became less likely to have foreign players. 23

The authors also show that the mobility of players had a negative impact on the performance of football clubs in countries with high tax rates.

This evidence, suggesting that 'superstars' are very responsive to taxation, contrasts with the available evidence for typical individuals – while still highly debated, most empirical estimates suggest that for the majority of the population, labor supply choices are not very responsive to changes in income tax rates. 24

Interactive Charts on Taxation

Besley T. and Persson T. Taxation and Development. Handbook of Public Economics, Volume 5, Pages 1-474 (2013), vol. 5

The countries in the sample are Argentina, Australia, Brazil, Canada, Chile, Colombia, Denmark, Finland, Ireland, Japan, Mexico, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States.

The source is Besley T. and Persson T. Taxation and Development. Handbook of Public Economics, Volume 5, Pages 1-474 (2013), vol. 5

Flora, Peter et al. 1983. State, Economy and Society in Western Europe, 1815-1975. Frankfurt: Campus Verlag

Wallis, J. J. (2000). American government finance in the long run: 1790 to 1990 . The Journal of Economic Perspectives, 14(1), 61-82.

Arroyo Abad, L. and P. Lindert. "Fiscal Redistribution in the Americas since the Mid-Nineteenth Century" in Latin American Inequality in the Long Run, edited by L. Bertola and J. Williamson, 2016.

Prichard, W., Cobham, A., & Goodall, A. (2014). ICTD Government Revenue Dataset ICTD working paper 19 . Institute of Development Studies, Brighton.

Jha, Raghbendra. (2008). Chapter 55, International Handbook of Development Economics, Volume 1. Edward Elgar Publishing, Incorporated, 2008.

Todaro, M. and Smith, S. (2014) Economic Development, 12th Edition. Pearson. ISBN: 1292002972

OECD (2016) Consumption Tax Trends 2016, OECD Publishing, Paris.

OECD/KIPF (2014), The Distributional Effects of Consumption Taxes in OECD Countries, OECD Publishing, Paris.

For more details see Congressional Budget Office (2016). The Distribution of Household Income and Federal Taxes, 2013 .

Pre-tax income corresponds to 'market income'. This includes labor income, business income, capital gains (profits realized from the sale of assets), capital income excluding capital gains, income received in retirement for past services, and other sources of income.

Congressional Budget Office (2016). The Distribution of Household Income and Federal Taxes, 2013 .

Piketty, T., & Saez, E. (2007). How Progressive Is the U.S. Federal Tax System? A Historical and International Perspective . The Journal of Economic Perspectives, 21(1), 3-24.

Piketty, T., & Saez, E. (2007). How Progressive Is the U.S. Federal Tax System? A Historical and International Perspective . The Journal of Economic Perspectives, 21(1), 3-24. Retrieved from http://www.jstor.org/stable/30033699

Lindert, P. H. (2012). Social Contract Budgeting: Prescriptions from Economics and History . Renewing the American Social Contract policy papers. New American Foundation.

Prichard, W. (2016). Reassessing Tax and Development Research: A New Dataset, New Findings, and Lessons for Research . World Development, 80, 48-60.

Benedek, D., Crivelli, E., Gupta, S., & Muthoora, P. (2014). Foreign aid and revenue: Still a crowding-out effect? . FinanzArchiv: Public Finance Analysis, 70(1), 67-96.

Kleven, H. J., Landais, C., & Saez, E. (2013). Taxation and international migration of superstars: Evidence from the European football market . The American Economic Review, 103(5), 1892-1924.

The Bosman ruling banned restrictions on foreign EU players within national leagues and allowed players in the EU to move to another club at the end of a contract without a transfer fee being paid.

Saez, E., Slemrod, J., & Giertz, S. H. (2012). The elasticity of taxable income with respect to marginal tax rates: A critical review . Journal of economic literature, 50(1), 3-50.

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Purposes of taxation

• Classes of taxes
• History of taxation
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What is taxation?

How does taxation relate to government revenue, what is a direct tax, what is an indirect tax, what is vat (value-added tax).

taxation , imposition of compulsory levies on individuals or entities by governments. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purposes as well.

This article is concerned with taxation in general, its principles, its objectives, and its effects; specifically, the article discusses the nature and purposes of taxation, whether taxes should be classified as direct or indirect, the history of taxation, canons and criteria of taxation, and economic effects of taxation, including shifting and incidence (identifying who bears the ultimate burden of taxes when that burden is passed from the person or entity deemed legally responsible for it to another). For further discussion of taxation’s role in fiscal policy , see government economic policy . In addition, see international trade for information on tariffs .

In modern economies taxes are the most important source of governmental revenue . Taxes differ from other sources of revenue in that they are compulsory levies and are unrequited—i.e., they are generally not paid in exchange for some specific thing, such as a particular public service, the sale of public property , or the issuance of public debt . While taxes are presumably collected for the welfare of taxpayers as a whole, the individual taxpayer’s liability is independent of any specific benefit received. There are, however, important exceptions: payroll taxes , for example, are commonly levied on labour income in order to finance retirement benefits, medical payments, and other social security programs—all of which are likely to benefit the taxpayer. Because of the likely link between taxes paid and benefits received, payroll taxes are sometimes called “contributions” (as in the United States ). Nevertheless, the payments are commonly compulsory, and the link to benefits is sometimes quite weak. Another example of a tax that is linked to benefits received, if only loosely, is the use of taxes on motor fuels to finance the construction and maintenance of roads and highways, whose services can be enjoyed only by consuming taxed motor fuels.

During the 19th century the prevalent idea was that taxes should serve mainly to finance the government . In earlier times, and again today, governments have utilized taxation for other than merely fiscal purposes. One useful way to view the purpose of taxation, attributable to American economist Richard A. Musgrave , is to distinguish between objectives of resource allocation, income redistribution, and economic stability. (Economic growth or development and international competitiveness are sometimes listed as separate goals, but they can generally be subsumed under the other three.) In the absence of a strong reason for interference, such as the need to reduce pollution , the first objective, resource allocation, is furthered if tax policy does not interfere with market-determined allocations. The second objective, income redistribution, is meant to lessen inequalities in the distribution of income and wealth. The objective of stabilization—implemented through tax policy, government expenditure policy, monetary policy , and debt management—is that of maintaining high employment and price stability.

There are likely to be conflicts among these three objectives. For example, resource allocation might require changes in the level or composition (or both) of taxes, but those changes might bear heavily on low-income families—thus upsetting redistributive goals. As another example, taxes that are highly redistributive may conflict with the efficient allocation of resources required to achieve the goal of economic neutrality.

Is tax the lifeblood of the government?  

Insight from top 5 papers.

Taxation is often referred to as the lifeblood of government [1] . It is the central source of public revenue and without it, the functions and aspects of the modern state would not be possible [2] . Taxation is crucial for the development of an effective, modern state and helps define the concept of fiscal citizenship [2] . However, there is a misconception among many Americans that they are overtaxed compared to citizens of other advanced nations [3] . In reality, the United States is one of the least taxed industrialized nations, with a total taxes/GDP ratio well below the OECD average [3] . Taxation plays a vital role in consolidating and stabilizing government, allowing it to function and provide necessary services [4] . In addressing the shortage of blood and organ donors, tax credits can be used as an effective and ethical solution [5] .

Source Papers (5)

Related Questions

Tax revenue plays a crucial role in influencing government effectiveness by providing a stable fiscal environment for economic growth and social development . Effective taxation policies can impact a nation's welfare by controlling revenue generation and guiding government expenditures towards various developmental aspects . In developing countries like Bangladesh, tax revenue contributes significantly to achieving fiscal goals and macroeconomic stability, showcasing its importance in determining fiscal policy effectiveness . Moreover, the effectiveness of tax revenue collection can be hindered by factors like tax evasion and inadequate tax planning, affecting the distribution of corporate income tax and overall government revenue . Enhancing tax administration through proper design, policies, administrative structures, and coordination can lead to increased revenue collection, efficient tax systems, and improved service delivery capabilities, ultimately boosting government effectiveness .

Tax revenues are the lifeblood of the government, providing a predictable and sustainable source of government revenue . Taxation is the key link between the state and its citizens, institutionalizing the concept of a social contract . It helps define the meaning of fiscal citizenship and shapes social and cultural conceptions of government programs . Taxation has replaced the government's accountability to independent-minded MPs with accountability to an electorate that periodically re-elects or ejects the government . There is a unidirectional causality between tax revenues and government expenditures, with tax revenues having a causal impact on government spending .

Taxes have harmful effects on the economy and individuals. They can reduce per capita real GDP growth and hinder economic growth . Taxes also diminish disposable income and leave consumer wants unattended, as the money goes to the government instead . Progressive taxation, which punishes successful individuals with higher tax rates, can be detrimental to the economy and reduce incentives . Additionally, increasing taxation can raise the cost of living, leading to a decline in the marriage and birth rates . However, taxes can also be used as a financial tool to manage harmful products, services, and practices, promoting public health and preserving the financial sustainability of the healthcare system . By levying taxes on harmful products, services, and practices, consumer choices can be influenced, leading to healthier lifestyles and reduced healthcare costs .

The optimal tax on veblen goods should not be uniform, but should instead discourage consumption of goods with large expenditure elasticities . The Mirrlees Review recommends that commodity taxation should generally be uniform, but this recommendation is contradicted by theoretical results . The optimal commodity tax system depends on the expenditure side of the government, and if the government fully subsidizes the cost of the good needed for working, then commodity taxation can be uniform under the standard separability assumption . However, the optimal tax system should discourage consumption of veblen goods relatively more, based on their larger expenditure elasticities . Therefore, the government should consider taxing veblen goods differently than other goods in order to achieve optimal outcomes in the tax system.

Taxation issues addressed in the abstracts include: the effect of the UK tax system on capital investment, corporate financial policy, and leasing ; the need for a tax system in the US that raises revenues in a simple, equitable, and growth-friendly manner ; the problem of taxation on profits generated by big data and the need for clear tax laws and standards for international transactions of big data ; different approaches to the content and structure of taxation principles ; and a conceptual overview of taxation, including its main functions of raising revenue, redistributing income, and correcting externalities, as well as topics such as tax equity and administration .

Trending Questions

In decision-making, various complexity and interactivity factors significantly influence outcomes. These factors create a multifaceted environment that decision-makers must navigate, often leading to unpredictable results. ## Key Factors Influencing Decision-Making - **Diverse Influences**: A study identified 40 distinct influences on public decision-makers, highlighting the complexity of their operating environment. These influences vary in importance based on context and the decision-maker's self-efficacy. - **Social Networks**: In the context of organ donation, decision-making involves multiple family members, with social network analysis revealing extensive communication before final decisions. This illustrates the interactivity of familial ties in complex decisions. - **Cognitive Skills and Environment**: The complexity of the decision-making environment affects individual performance and neural responses. Higher cognitive skills correlate with better navigation through complex strategic settings. - **Facets of Complexity**: Five facets of decision-making complexity include choice structure, environment, information, dynamic change, and interconnectedness, emphasizing the intricate nature of decision contexts. While these factors enhance understanding of decision-making complexity, they also suggest that decision-makers can leverage these influences to improve outcomes. However, the interplay of these factors can also lead to confusion and misalignment in objectives.

Mexico has implemented several fiscal measures to combat obesity, primarily through taxation on unhealthy foods and beverages. These measures are part of a broader national strategy aimed at reducing the consumption of products that contribute to obesity and related non-communicable diseases (NCDs). The fiscal policies have shown some success in altering consumption patterns and generating revenue for further health initiatives. Below are the key aspects of Mexico's fiscal measures against obesity. ## Taxation on Sugary Drinks and Energy-Dense Foods - In 2014, Mexico introduced taxes on sugar-sweetened beverages and nonessential energy-dense foods. The tax on sugary drinks was set at 1 peso per liter, while an 8% tax was levied on energy-dense nutrient-poor foods . - These taxes have led to a reduction in the purchase of sugary drinks by 7.6% and nonessential energy-dense foods by 7.4%. - The reduction in consumption is associated with potential decreases in obesity prevalence, cardiovascular disease events, and diabetes cases, alongside significant healthcare cost savings. ## Impact on Consumption Patterns - The introduction of these taxes resulted in a 5.3% reduction in the purchase of taxed foods, with more pronounced effects in urban areas and among households with children. - A modeling study predicted that the tax on nonessential energy-dense foods could lead to a reduction in body mass index and prevalence of overweight and obesity in children. ## Broader Policy Framework - Mexico's strategy includes not only fiscal measures but also informational and authoritative tools such as school food guidelines, front-of-pack labeling, and marketing regulations. - These interventions aim to improve the food environment and promote healthier choices, particularly in regions with social inequities and limited access to information. While these fiscal measures have shown effectiveness in reducing the consumption of unhealthy foods, challenges remain. The volatility in the prices of healthy foods and the need for continuous monitoring and adjustment of these policies are crucial for sustained impact. Additionally, comprehensive strategies that include global initiatives and address broader food system transformations are necessary to tackle obesity effectively in the long term.

Influencers can effectively increase donation rates by leveraging personal stories that evoke empathy and emotional engagement. This approach not only humanizes the cause but also fosters a deeper connection with potential donors. ## Emotional Engagement - Personal stories create emotional responses, enhancing state empathy and perceptions of suffering, which are directly linked to increased donation intentions. - Narratives that focus on identifiable victims rather than abstract statistics resonate more with audiences, leading to higher engagement and willingness to donate. ## Storytelling Techniques - Successful storytelling should emphasize hope and resilience rather than victimhood, as this approach avoids exploitation and maintains audience interest. - Influencers can utilize personalized narratives that highlight relatable experiences, making the cause more accessible and compelling. While personal stories can significantly boost donations, there is a risk of oversimplifying complex issues or exploiting the storytellers' experiences. Balancing emotional appeal with authenticity is crucial for maintaining credibility and fostering genuine support.

Corporate recovery in the Philippines, particularly through the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, aims to revitalize the economy post-COVID-19 by enhancing competitiveness and attracting foreign investment. This strategy is crucial for integrating advanced technologies and fostering innovation across sectors. ## Corporate Recovery and CREATE Act - The CREATE Act aligns with the Philippines' new industrial policy, focusing on digital transformation and resilience in manufacturing, agriculture, and services. - It emphasizes the need for investments in science, technology, and innovation (STI) to boost productivity and economic recovery. ## Tax Incentives Landscape - The Philippines offers a variety of fiscal incentives to attract foreign direct investment, crucial for economic growth, especially in a competitive ASEAN market. - However, the effectiveness of these incentives is debated, as the country has seen a decline in revenue relative to output, raising concerns about sustainability. While the CREATE Act and tax incentives are designed to stimulate growth, there are ongoing discussions about their long-term efficacy and the need for reforms to ensure they meet the evolving economic landscape.

To effectively collaborate with influencers and increase donation rates, NGOs should adopt strategic approaches that leverage social media dynamics and influencer credibility. ## Targeted Messaging - NGOs should utilize different benefit appeals in their campaigns. For instance, hedonic appeals work well for NPO posts, while utilitarian appeals are more effective when influencers promote donations. - Emotionally driven content has shown to significantly enhance engagement, with infographics and short educational videos outperforming traditional methods. ## Influencer Selection - Choosing the right influencers is crucial. NGOs can use Social Network Analysis (SNA) to align influencer outreach with public interests and donation needs, ensuring a more effective campaign. - Influencers should be selected based on their ability to foster trust and loyalty among their followers, which can lead to increased engagement and donations. ## Community Building - Establishing a community on social media before launching campaigns can enhance engagement rates. This approach allows NGOs to tailor content effectively and stimulate dialogue around donation causes. While these strategies can significantly boost donation rates, it is essential to recognize that not all influencer collaborations yield positive results. Some partnerships may not resonate with the target audience, leading to ineffective campaigns. Thus, careful planning and evaluation are necessary to ensure successful outcomes.

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Taxation: Philosophical Perspectives

Martin O'Neill and Shepley Orr (eds.), Taxation: Philosophical Perspectives , Oxford University Press, 2018, 264pp., $55.00 (hbk), ISBN 9780199609222.

Reviewed by Matthew Braham, Universität Hamburg

Taxation is central to the existence of states. It is its income and expenditure. Taxation finances the production of goods and services that the market undersupplies, is the source of income for those in need, and is used to incentivize behaviour -- to encourage people to reduce the consumption of personally or socially or environmentally unhealthy things and practices. Tax policy is therefore a key element of the wherewithal of our personal lives. Yet, a quick search on work by moral and political philosophers on taxation will reveal an interesting fact: it is a subject that has not received much detailed attention. And, the work that has been produced is somewhat fragmented.

This collection aims at correcting this state of affairs by bringing together philosophers who work mostly at the intersection of philosophy and economics. We are offered 12 new essays that highlight taxation as a key issue for moral and political philosophers. As the editors, Martin O'Neill and Shepley Orr, point out in their introduction, taxation is an "irreducibly normative matter, and one which implicates a number of our concerns of social justice. When we think about issues of social justice in practice, we cannot avoid thinking at the same time about tax" (p. 2). Taxation is foundational to our thinking about property rights, democracy, and the nature and role of the state.

The volume is divided into two parts. Part I (seven essays) focusses on normative and conceptual questions. Part II (five essays) delves into a variety of policy issues. O'Neill and Orr's comprehensive introduction lays out the philosophical context for both parts. They begin with the stark and contrasting positions of Robert Nozick and John Rawls. In a memorable passage in Anarchy, State, and Utopia (1974), Nozick claimed that "Taxation of earnings from labour is on par with forced labor" (p. 169). In Nozick's libertarian world view, mandatory taxation is limited to providing for a minimal state that protects and enforces property rights only. Redistributive transfers for those in need are not morally permissible. Such transfers would be injustices, violations of just pre-tax entitlements. Providing for those in need is, rather, a task for charity. In contrast, Rawls believed that there are no pre-political constraints on property rights, which are themselves part of the "basic structure" of society. In the Rawlsian world, a tax system is just insofar as it is part of the overall system of rules and institutions that satisfy his two principles of justice. Hence, given that redistribution is required by Rawlsian justice, it follows that redistributive taxation is morally permissible.

Having staked out the Nozickean-Rawlsian divide, O'Neill and Orr situate the essays within the Rawlsian universe that had its fullest development in the now seminal treatment by Liam Murphy and Thomas Nagel in The Myth of Ownership (2002). Murphy and Nagel's standpoint is that "pre-tax income" has no special normative status; there are no primitive entitlements to property. Many of the essays engage directly with this thought and attempt to find a middle ground between the Rawlsian and Nozickean positions.

An illuminating feature of the collection is that it opens up what Alan Hamlin, in "What Political Philosophy Should Learn from Economics about Taxation", denotes as the "black box" technology of taxation. Political philosophers, he notes, are especially prone to call upon this technology to "put into effect whatever distribution of economic benefits and burdens that is required by the normative theory under discussion" (p. 20). Hamlin unpacks the black box with an elegant review and understanding of different economic theories of taxation: Optimal Taxation, the Political Economy of Taxation, and the Tax Constitution Approach. This is very refreshing and stands out from the stock "economics bashing" that many political philosophers -- even those who claim an economics background -- presumptively engage in without a whimper of thought and respect for the discipline. Hamlin notes that political philosophers with a non-ideal theory bent are well advised to study carefully and with an open mind what economists have to offer. It is fair to say that the collection provides the reader and the disciplines an intellectual programme that goes far beyond taxation.

Marc Fleurbaey's "Welfarism, Libertarianism, and Fairness in the Economic Approach to Taxation" immediately takes up the baton of optimal taxation discussed by Hamlin and defends it against the criticism set out in Murphy and Nagel's Myth of Ownership . Fleurbaey shows us that it is possible to enrich the orthodox optimal taxation theory of welfare economics with elements of libertarianism and fairness. Here, I believe we are observing progress in both philosophy and economics through careful modelling of normative principles bounded by weak descriptive conditions of rational choice. Again, critics of economics take note: Fleurbaey achieves his goal without a formula in sight; however, his formal work on taxation underlies the essay.

Geoffrey Brennan's "Striving for the Middle Ground: Taxation, Justice, and the Status of Private Rights" begins by directly engaging Murphy and Nagel and also by expanding on the Tax Constitution approach outlined by Hamlin. Brennan himself pioneered this approach together with James M. Buchannan in their influential The Power to Tax (1980). Brennan denotes his analysis as "quasi-Rawlsian". There is a methodological reason for this, because he asks what the "constitutional architecture" of society would deliver in terms of a tax system. But this is not about Rawls' Two Principles. Rather, it is an investigation into basic democratic procedures and the structure of private rights (that include property rights) and how these determine a just tax system. That is, the principles of taxation emerge from the interplay of constitutional elements. In an interesting twist to Nozick's "minimal state", Brennan discusses the "maximal state", which is the largest possible state subject to constitutional constraints, one of which is the system of private property rights. One of Brennan's thought provoking conclusions is that Rawlsian principles of justice in a capitalist society will not fully realize Rawls's own principles.

"Taxing or Taking? Property Rhetoric and the Justice of Taxation" by Laura Biron, is more traditionally philosophical. She, too, takes her cue from Murphy and Nagel, but her angle of analysis is that the starting point of thinking about the tax system is philosophical and jurisprudential thinking about property. In a sense, this is Nozick's line (although she comes to different conclusions) and Biron is engaging in a conversation with economists and asking them to go back to conceptual basics. And along with Brennan, she is skeptical about Murphy and Nagel's "myth of ownership".

Peter Vallentyne's "Libertarianism and Taxation" makes clear what a rich subject taxation is for moral and political philosophers. He argues that the moral doctrine that "individuals initially fully own themselves, that natural resources are initially unowned, and that individuals initially have certain unilateral moral powers (requiring no consent from others) to use and appropriate unowned natural resources" (p. 99) supports a variety of views on just taxation. Nozick's right-libertarian view that taxation beyond a charge for the protection of property rights is "on par with forced labor" is just one view. There are also sufficientarian (centrist) and left-libertarian views , with the latter breaking down into two sub-forms of equal-share and equal-opportunity libertarianism. Each of these views permit taxation over and above the Nozickean minimum.

Alexander W. Cappelen and Bertil Tungodden's "Tax Policy and Fair Inequality" is another prime example of an economic analysis that builds in substantive normative reflection. It also picks up where Fleurbaey left off. Cappelen and Tungodden aim to explore the shape of a liberal-egalitarian system (Rawlsian) and in particular to try and get around the well-known problems of responsibility-insensitivity that besets Rawlsian justice (avoiding exploitation of the hardworking and talented). One fascinating result is that they show precisely why political philosophers need to peer inside the "black box" of taxation. In their framework,

a progressive income tax system may have two opposing effects on fairness. It may increase the level of unfairness in society by eliminating fair inequalities reflecting differences in responsibility factors, but it may also reduce the level of unfairness in society by eliminating unfair inequalities reflecting differences in non-responsibility factors. (p. 121)

In other words, we are reminded of the falsity of what John Harsanyi once called the "all good things come together assumption". Desirable values are not always positively correlated. Another very appealing feature of this essay is that the authors cap their analysis with an empirical case study of their fair tax system using Norwegian data. The essay is a "must read" for the modern political philosopher eager to engage with policy-making.

The final essay in Part I is another piece of traditional normative analysis. "Beggar Your Neighbour (Or Why You Do Want to Pay Your Taxes)" by Véronique Munoz-Dardé and M. G. F. Martin takes issue with libertarian views on taxation, in particular that the needy are to be provided for by charity rather than via state redistribution. They argue that there are reasons why redistributive taxation instead of charitable giving would be favoured by the taxpayers themselves. The argument can be summed up as follows: mandatory taxation is simply a more efficient way of collecting and distributing resources for the needy. They write:

Even if you, as a well-meaning individual who keeps their life in good order, manage to provide a large amount in donations to various charities, still it is likely that you will be bothered in some way or another by further charitable organizations looking to raise their income to meet the demands on them. In such a world, the irritations of the double-glazing salesman, or the mortgage salesman, or the new phone deal, would pale in comparison with the campaigns run by the major charities seeking to meet the needs of the poor. (p. 138)

Munoz-Dardé and Martin argue that it is reasonable to reject such a system. This idea is crying out for a carefully constructed economic model that actually delivers a formal proof of the proposition. Until then, the jury is still out.

Part II begins with "The Case for a Progressive Benefits Tax" by Barbara H. Fried. Fried opens Hamlin's "black box" of taxation and investigates it from a "Tax Constitutional Approach". That is, we are presented with the question of whether we "should take the preferences of taxpayers into account in deciding how tax revenues are raised and spent", and are provided with the trite answer: "Of course we should". And it is observed that in a democracy we "automatically will", as these decisions are delegated to elected representatives. But as Fried points out, there is a lot more here than meets the eye. We are asked a difficult further question: is a majoritarian or a supermajoritarian decision rule the appropriate one for determining fiscal policy? Starting from a broadly libertarian premise that taxation is just if it is limited to provision of public goods that the market undersupplies, Fried argues that this implies an individual's tax burden should be limited to cover the price of these goods. This is commonly referred to as "benefits taxation". She then makes an intriguing case for a strongly progressive tax rate for benefits taxation and one that will even permit redistribution for the purposes of social welfare. She ends with a more fundamental issue: "What counts as a public good (benefit) for which the state can rightly charge?" She believes it includes much of our built and social and physical environment: from norms of civility to architecture, good teachers, and well-functioning hospitals. Her version of libertarianism seems to have the capacity to accommodate this position.

Stuart White's "Moral Objections to Inheritance Tax" returns us to a more standard way that philosophers use to look at the world. His task is to carefully dismantle four major moral arguments against inheritance tax: the double tax objection, the equity objection, the virtue objection, and the wrong problem objection. The first says that inheritance tax is unfair because tax has already been paid on the assets; the second says that inheritance tax is unfair because it leads to unequal tax burdens on people who have equal wealth but choose to use that wealth differently; the third says that inheritance tax penalizes virtuous behavior; and the forth says that inheritance tax does not solve the problem it sets out to address (inequality), because it is fixed on inequality of possessions whereas the real issue is inequality of consumption. Depending on your moral priorities, you will or will not agree that White achieves his objectives. It really depends on whether you gauge these objections to be the "strongest possible". Also, defeating four objections does not imply that that the path is clear to impose an inheritance tax. The jury is out on this one, too.

"The Politics of Land Value Taxation", by Iain McLean, ends with a very abrupt paragraph: "Property is not theft. But it could be taxed in a more rational way than at present. In the long run, everybody would gain" (p. 201). This says it all. McLean argues that a land value tax "has both theoretical and practical merit". He examines both the intellectual and political history of land tax drawing mostly on examples from the United Kingdom. A key part of the essay is the section on the practical politics of a land tax. Having discussed the merits of a Land Value Tax, McLean is aware that it is also unpalatable for many, so he asks "How then could a brave government make Land Value Tax for housing acceptable to the median voter?" Here, McLean engages in a form of political engineering with the aid of Public Choice Theory. There isn't space here to set out his four suggestions, but they are eye-opening -- particularly his case of the "Devon widow", which is the situation of an asset rich/cash poor household. His solution is to defer the tax liability until after death or at the time the property is sold.

In "The State and Tax Competition: A Normative Perspective", Peter Dietsch moves the discussion to an area of tax justice that has been largely overlooked by political philosophers: the strategic interaction effects of tax regimes in a global economy. He targets the effect on social justice when states compete with each other for mobile capital through low tax rates and favorable regulation. Although this competition is clearly a way for governments to stimulate economic growth and create jobs, it simultaneously interferes with, and even undermines, the fiscal independence of states and hence their ability to fund public services and meet local demands of social justice. That is, there are spill-over effects of fiscal policy. The underlying question is whether there are any moral limits to the migration of the tax base between countries. "The crucial question", asks Dietsch, "becomes which portion of fiscal interdependence should be considered benign from a normative viewpoint, and which portion should be condemned as problematic" (p. 214). He answers this by introducing two normative principles: the autonomy prerogative and the global justice constraint . That is, for fiscal policy to be just, it must be able to implement autonomous political choices and promote distributive justice globally. Thus, jurisdictional rules on tax competition must be designed so as to respect these twin principles.

In the final essay, "Global Taxation and Accounting Arrangements: Some Normatively Desirable and Feasible Policy Recommendations", Gillian Brock and Rachel McMaster delve into the nitty gritty of accounting practices and how they contribute to what is cogently termed as tax escape -- tax avoidance and evasion. In particular, they examine the practice of "transfer pricing" used for sales and purchases within a company or group of companies. The practice permits profits to be disguised and taxes avoided. Brock and McMaster also provide a review of the characteristics, scope, and effects of tax havens. They offer insight into means for regulating tax escape, including such global taxes as air ticket taxes and currency transaction taxes. At a very practical level they set out four normative and four feasibility criteria for collecting global taxes. They show that air ticket and currency transactions taxes meet these criteria and to their mind serve as an example of how to implement Thomas Pogge's Global Resource Dividend. The book thus ends exactly with the point made at the outset by Hamlin: we need to open up the black box of taxation.

This is a friendly review from someone who works at the interface of philosophy and economics. Does the collection come up short in any way? That would require dissecting each essay –which I haven't taken to be my remit. My remit is the collection as a whole, which I find to be an excellent entry into the world of taxation and an exercise in that growing research area we call PPE. One of my own tests for how good a book is, is whether I would include it as essential reading for an undergraduate course. Yes, I certainly would.

The book's overall message is that the Libertarian, Rawlsian and standard welfare economics views of taxation are much richer, complex, and flexible than generally thought. Regardless of the rhetorical appeal, it really would be best were we to refrain from using the Nozickean forced labour argument, to refrain from simply stating that a tax system is just if it is part of the "basic structure", and to refrain from setting optimal tax theory against fairness. And even if we agree that a tax is justifiable for whatever purpose, it requires careful and detailed elaboration of the tax system itself.

Theme 1: Your Role as a Taxpayer Lesson 1: Why Pay Taxes?

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Taxes & Government Revenue

The collection of taxes and fees is a key development priority. It is essential to finance investments in human capital, infrastructure and the provision of services for citizens and businesses, as well as to set the right price incentives for sustainable private-sector investment.

Collecting taxes is the main way for countries to generate public revenues that make it possible to finance investments in human capital, infrastructure, and the provision of services for their people and businesses. Yet multiple crises have reduced developing countries’ revenues while increasing their spending in recent years.

Progress in areas such as access to nutritious food and vaccine coverage—with a clear need for public investment—is significantly backsliding.

The need to increase revenue collection is particularly acute in countries that currently collect less than 15% of GDP in taxes. This level of taxation is an important tipping point to make a state viable and put it on a path to growth. But 86% of low-income countries and 43% of lower middle-income countries are below this threshold. In countries affected by fragility, conflict, and violence, the average tax-to-GDP ratio was as low as 12.6 percent in 2023.

To resume economic growth, reduce poverty, and support climate action, countries need to increase tax collection and make tax systems more equitable and efficient. Governments need to balance goals such as increased revenue mobilization, sustainable growth, and reduced compliance costs with ensuring that the tax system is fair and equitable. Fairness considerations include the relative taxation of the poor and the rich; corporate and individual taxpayers; cities and rural areas; formal and informal sectors, labor, and investment income; and the older and the younger generations.

More efficient tax systems can also enable the private sector to play the important role of creating jobs.

Last Updated: Apr 10, 2024

The World Bank is the largest provider of finance for collecting public revenue. It also provides governments with guidance and support to reach their tax potential and make their tax systems more production-efficient and progressive.

By April 2024, commitments to support interventions related to domestic resource mobilization totaled $3.4 billion, of which $1.8 billion in support of the world’s poorest countries.

The World Bank is supporting countries to not only collect more but collect better. Reform priorities include:

• Broadening tax bases by rationalizing inefficient, ineffective, and poorly targeted tax expenditures, particularly for personal income taxes, corporate income taxes, and value-added taxes;
• Mobilizing resources from undertaxed bases, such as capital income and residential property;
• Increasing the progressivity of personal income taxation;
• Increasing the use of taxes that correct for negative externalities—consequences of an activity that is not reflected in the cost of that activity—with a focus on environmental taxes;
• Curbing corporate tax avoidance and evasion, including base erosion and profit shifting, and ensuring fairer and more effective taxation of the digital economy;
• Enhancing capacity to tackle tax evasion and other illicit financial flows;
• Improving the effectiveness of natural-resource taxation;
• Tapping into other revenue sources, including non-tax and non-debt instruments; and
• Expanding engagement on revenue aspects of trade policy and customs administration.
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• Taxation Without Representation
• Modern Examples

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Taxation Without Representation: What It Means and History

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Lea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.

What Is Taxation Without Representation?

The phrase taxation without representation describes a populace that is required to pay taxes to a government authority without having any say in that government's policies. The term has its origin in a slogan of the American colonials against their British rulers: " Taxation without representation is tyranny."

Key Takeaways

• Taxation without representation was possibly the first slogan adopted by American colonists chafing under British rule.
• They objected to the imposition of taxes on colonists by a government that gave them no role in its policies.
• In the 21st century, residents of the District of Columbia and Puerto Rico are U.S. citizens who endure taxation without federal representation.

Investopedia / Candra Huff

History of Taxation Without Representation

Although taxation without representation has been perpetrated in many cultures, the phrase came to the common lexicon during the 1700s in the American colonies. Opposition to taxation without representation was one of the primary causes of the American Revolution.

The Stamp Act Triggers Colonists

The British Parliament began taxing its American colonists directly in the 1760s, ostensibly to recoup losses incurred during the Seven Years’ War of 1754 to 1763.

One particularly despised tax, imposed by the Stamp Act of 1765 , required colonial printers to pay a tax on documents used or created in the colonies and to prove it by affixing an embossed revenue stamp to the documents.

Violators were tried in vice-admiralty courts without a jury. The denial of a trial by peers was a second injury in the minds of colonists, compounding the problem of taxation without governmental representation.

Revolt Against the Stamp Act

Colonists considered the tax to be illegal because they had no representation in the Parliament that passed it and were denied the right to a trial by a jury of their peers. Delegates from nine of the 13 colonies met in New York in October 1765 to form the Stamp Act Congress.

William Samuel Johnson of Connecticut, John Dickinson of Pennsylvania, John Rutledge of South Carolina, and other prominent colonials met for 18 days. They then approved a "Declaration of the Rights and Grievances of the Colonists," stating the delegates’ joint position for other colonists to read. Resolutions three, four, and five stressed the delegates’ loyalty to the crown while stating their objection to taxation without representation.

A later resolution disputed the use of admiralty courts that conducted trials without juries, citing a violation of the rights of all free Englishmen. The Congress eventually drafted three petitions addressed to King George III, the House of Lords, and the House of Commons.

After the Stamp Act

The petitions were initially ignored, but boycotts of British imports and other financial pressures by the colonists finally led to the repeal of the Stamp Act in March 1766. In spite of the repeal, and after years of increasing tensions, the American Revolution began on April 19, 1775, with battles between American colonists and British soldiers in Lexington and Concord.  

On June 7, 1776, Richard Henry Lee introduced a resolution to Congress declaring the 13 colonies free from British rule. Benjamin Franklin, John Adams, and Thomas Jefferson were among the representatives chosen to word the resolution that declared the colonists' intent to dissolve ties with Britain and become self-governing. Taxation without representation has since been considered one of the instigating grievances of the American Revolution.

The Second Continental Congress adopted the Declaration of Independence on July 4, 1776, with the signing occurring primarily on Aug. 2, 1776.

Modern Examples of Taxation Without Representation

Taxation without representation in the United States did not end with the separation of the American colonies from Britain . There are still parts of the U.S. that pay taxes without receiving representation in the federal government.

Residents of Puerto Rico, for example, are U.S. citizens but do not have the right to vote in presidential elections. They also have no voting representatives in the U.S. Congress unless they move to one of the 50 states.

Residents of Washington, D.C., pay federal taxes despite having no voting representation in Congress. Beginning in the year 2000, the phrase "Taxation Without Representation" appeared on license plates issued by the District of Columbia to increase awareness of this disparity. In 2017, the District's City Council changed the slogan to "End Taxation Without Representation."

Which Tax Triggered the Rebellion Against Great Britain?

The Stamp Act of 1765 angered many colonists as it taxed every paper document used in the colonies. It was the first tax that the crown had demanded specifically from American colonists. However, there were many causes of the American Revolution in addition to anger over the Stamp Act.

Did Taxation Without Representation End After the American Revolution?

After the American Revolution, taxation without representation ended in some areas of the United States. While residents of the 50 states can elect representatives to the federal government, federal districts like Washington, D.C., and territories like Puerto Rico still lack the same representation on the federal level.

Does Taxation Without Representation Refer to Local or Federal Government?

Today, the phrase refers to a lack of representation at the federal level. As an example, Puerto Rico has the same structure as a state, with mayors of cities and a governor. Puerto Ricans are United States citizens. But instead of senators or representatives in Congress, they have a resident commissioner that represents the people in Washington, D.C., and Puerto Ricans can only vote for president if they establish residency in the 50 states.

"Taxation without representation" refers to those taxes imposed on a population who doesn't have representation in the government. The slogan "No taxation without representation" was first adopted during the American Revolution by American colonists under British rule.

Today, the phrase refers to a lack of representation at the federal level. Residents of Washington, D.C., and Puerto Rico are still taxed without representation.

National Constitution Center. " On This Day: 'No Taxation Without Representation!' "

Government of the District of Columbia. " Why Statehood for DC ."

United States Department of State, Office of the Historian. " French and Indian War/Seven Years’ War, 1754–63 ."

National Parks Service. " Britain Begins Taxing the Colonies: The Sugar & Stamp Acts ."

Library of Congress. " Magna Carta: Muse and Mentor - No Taxation Without Representation ."

University of Michigan Library. " Proceedings of the Congress at the New-York, Boston, 1765 ."

University of Michigan Library. " Proceedings of the Congress at New York - WEDNESDAY, October 23, 1765, A. M ."

University of Michigan Library. " Proceedings of the Congress at New York - TUESDAY, October 22, 1765, A. M ."

Yale Law School, The Avalon Project. " Great Britain: Parliament - An Act Repealing the Stamp Act; March 18, 1766 ."

American Battlefield Trust. " Lexington and Concord ."

National Archives. " Signers of the Declaration of Independence ."

Library of Congress. " Declaring Independence: Drafting the Documents ."

National Park Service. " The Second Continental Congress and the Declaration of Independence ."

U.S. Commission on Civil Rights. " Voting Rights in US Territories ." Page 4.

National Archives. " Unratified Amendments: DC Voting Rights ."

Department of Motor Vehicles, District of Columbia. " End Taxation Without Representation Tags ."

Council of the District of Columbia. " B21-0708 - End Taxation Without Representation Amendment Act of 2016 ."

Library of Congress. " The Commonwealth of Puerto Rico and its Government Structure ."

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The income gap

Along with terrorism, climate change, disease pandemics, and the prospect of persistently low economic growth, inequality has crept up the international policy agenda to become one of the most urgent and important issues of our time. Harvard Professor Kenneth Rogoff has argued that “income inequality is the single biggest threat to social stability around the world, whether it is in the United States, the European periphery, or China.”

Inequality has also become a centerpiece of the 2016 presidential campaign, with both the Democratic and Republican nominees focusing on this crucial issue to win over the American public. This political debate tends to focus on income inequality, but widening inequality also has worrying compounding effects that permeate other aspects of the economy, from inequality in political influence to inequality in the quality of and access to education and health care.

“…income inequality is the single biggest threat to social stability around the world…” —Kenneth Rogoff

A few statistics help illustrate the problem. According to the Brookings Institution, for men born in 1920, there is a six-year difference in life expectancy between income-earners in the bottom 10 percent and those in the top 10 percent. For men born in 1950, that difference more than doubled, to 14 years. For women, the life expectancy gap nearly tripled, from 4.7 years for those born in 1920 to 13 years for those born in 1950. Meanwhile, just 158 wealthy U.S. families account for approximately half of the money fueling political/electoral campaigns, suggesting that political influence is skewed toward the rich, even in a democratic state.

Economic theory suggests that the relationship between income inequality and economic growth is ambiguous. Inequality in outcomes can incentivize individuals to work hard or be more productive than others in order to receive greater incomes—activity that spurs growth. Yet inequality may also limit the ability of the less fortunate to access opportunities or credit; it may cap demand, increase instability, and undermine incentives to work hard, thereby reducing economic growth. Growing inequality could also generate a relatively larger group of low-income individuals who are less able to invest in their health, education, and training, thereby retarding economic growth.

Simply put, inequality can hamper growth when poor individuals suffer from health problems and low productivity as a result of their income status, or are unable to invest in education. As we see in the current political climate in the U.S., inequality can also jeopardize public support for “growth-boosting policies” like free trade, creating a challenging and hostile political environment.

Nevertheless, according to the Organization for Economic Co-operation and Development (OECD), income inequality has increased an average of 3 Gini points across developed countries over the past two decades, and this has yielded a cumulative loss of 8.5 percent in GDP at the end of the period. [The Gini coefficient measures income inequality by measuring the distribution of income within a society. A Gini coefficient of zero expresses perfect equality, where everyone has the same income, whereas a Gini coefficient of 1 (or 100 percent) reflects extreme inequality, where income is skewed to one person and all others have none.]

In the 20-year period between 1985 and 2005, growing inequality is estimated to have knocked more than 10 percentage points off growth in Mexico and New Zealand; nearly 9 points in the United Kingdom, Finland, and Norway; and between 6 and 7 points in the United States, Italy and Sweden.

More specifically for the United States, the average income of Americans in the top 1 percent is roughly 30 times that of the average income of Americans in the remaining 99 percent. In 1978, the top percentile was just 10 times richer than the rest of the population.

To address these urgent problems, the incoming president must carefully frame the debate around income inequality. He or she should also recognize that the existing menu of policy interventions is inadequate to stem the widening inequality tide. New solutions are needed.

Fortunately, the advent of new technologies provides opportunities for the next president to push innovative ideas that address inequality by creating new avenues to build and grow small- and medium-sized businesses—and thus create jobs—and provide income growth and opportunities for more citizens.

Countering widening income inequality should be a high priority for the next president. However, there are at least four factors that complicate the income-inequality debate and cloud the direction of policy makers on how best to address the deleterious income-inequality trends. It is here that the incoming president will need to reframe the debate.

Countering widening income inequality should be a high priority for the next president.

1. Which system is best at reducing inequality?

First, compare the world’s two leading economies in terms of GDP: the United States and China. The U.S., with a GDP of over $16 trillion, has a political system based on liberal democracy and an economic ethos defined around market capitalism (even if not entirely pure), where the factors of production—capital, labor, and industry—are owned privately, rather than by the state. Meanwhile, China, the second-largest economy with a GDP of around $10 trillion, has relied on a political system that deprioritizes democracy and places the state at the heart of the economy as the main arbiter of capital and labor.

Although these two economies have completely different political and economic approaches, according to the CIA Factbook, they have roughly the same Gini coefficient of around 0.45.

Worse still, whereas China’s income inequality has notably improved in recent years—from 0.485 in 2005 to 0.45 today—that of the U.S. has worsened by approximately 5 percent over the past two decades.

The fact that the U.S. and China now have similar Gini coefficients poses a challenge for policy makers across the world (particularly across the emerging, poorer countries at the nascent stages of economic development), as it raises the question of which combination of political and economic systems can better address inequality.

Over a long time frame, the market capitalist system has, more than any other economic system, proven itself the best way to increase growth and create a greater economic surplus and a greater GDP pie. But the newer evidence from China shows that it is possible to meaningfully reduce income inequality without a free-market-based economic system or a democratic political system.

The improvements in China’s income inequality are, at least in part, due to deliberate policy initiatives introduced by Chinese policy makers. In February 2013, for example, the Chinese State Council introduced a reform plan titled the “Income Distribution Plan.” The plan is aimed at boosting minimum wages to at least 40 percent of average salaries, loosening controls on lending and deposit rates, and increasing spending on education and affordable housing, with the goal of reducing China’s income inequality. Other reforms targeted at shrinking China’s income gap include a requirement that state-owned enterprises contribute more of their profits to the reduction of inequality, as well as a commitment to push through market-oriented interest rate reforms to give savers a better return and more security.

All these measures directly reduce inequality. Yet it is not clear that the decentralized nature of the U.S. political system would support such sweeping, redistributive approaches. The incoming president will instead need to pursue more innovative indirect policy initiatives.

Similarities in income-inequality performance between market capitalist countries such as the U.S. and relatively nonmarket states such as China (where state capitalism is now the dominant economic form) are illuminating. However, relying further on the purer forms of free-market capitalism—where market factors are relied upon to match demand and supply and remedy widening income inequality—suggests no clear path to combat the worsening trend of within-country income inequality. The next president needs new strategies.

2. The inadequacy of traditional left-right solutions

This leads to the second complication policy makers are facing in their attempts to address worsening income inequality. In many democratic societies, political systems have tended to address income inequality by adopting either left-leaning tax-and-redistribute/spend policies or more right-leaning supply-side, trickle-down approaches, albeit with a lot of variation between these two extremes. Nevertheless, viewed over multiple decades, neither stance has managed to meaningfully reverse the inequality trend. In the U.S., for example, over the past two decades and despite policy interventions by both Republican and Democratic administrations, income inequality has widened over time.

This entrenched trend has buttressed the idea that widening income inequality is in fact a byproduct of a market capitalist system itself—an idea that comports with evidence that income inequality has progressively worsened in democratic and free-market economies (indicated by the rising trend line in this chart), with only a brief period of improvement, over the last 100 years. While some leaders have previously tried a mixed-economy model—the so-called “third way” using traditional policy approaches from both baskets of the Republican and Democratic parties—rising income inequality in recent decades indicates that this has not been a permanent success. Simply going back to the post-World War II model of economic policy is not the answer.

3. The importance of absolute levels of income and poverty

The income-inequality debate is further complicated by a third point—a lack of consensus as to whether, and how, an unequal society actually matters for longer-term economic progress. This is a question of whether policy makers should be less concerned with income inequality and the relative income differences across the population, and instead worry more about the absolute levels of income and degrees of poverty that exist in a society.

The core idea here is that the public good might be best served by raising basic living standards and ensuring access for all to quality food, shelter, health care, and infrastructure, rather than by trying to manage the spread between the richest and poorest. In essence, income inequality is not intrinsically bad for economic growth, and can actually be good—as long as there is opportunity for advancement. After all, financial rewards and the prospect of higher incomes are crucial for incentivizing entrepreneurs and innovation.

Against this backdrop, the new U.S. president should explore solutions to the challenge of income inequality over both short- and long-term horizons.

Those more concerned about relative income disparity tend to favor policy interventions that prioritize shorter-term interventions, such as income transfers or minimum wage laws. Often this requires greater taxation on higher-income earners (for transfers) or redistribution of company cash from shareholders to employees (in the case of minimum wage increases). However, such efforts to manage relative income-inequality concerns can discount the many benefits that the wealthy can contribute to economic growth: capital investment in new businesses, innovation, and ultimately job creation.

[I]ncome inequality is not intrinsically bad for economic growth, and can actually be good—as long as there is opportunity for advancement.

Those who subscribe to the view that public policy should be more focused on absolute poverty and raising a society’s average income levels tend to focus on longer-term public policy interventions, such as investments in education and infrastructure that seek to increase social mobility from lower to higher income levels.

According to the National Federation of Independent Business, small business owners cite the lack of qualified workers as a top business problem. Without improvements in job training and education, those at the bottom rung of incomes will have limited opportunity to change their incomes and economic situation. Thus investment in quality education (not just the quantity of dollars earmarked for it) is an area that could be important in the new presidential administration’s quest to address inequality.

In practice, both short- and long-term lenses are warranted, but both have real limitations. For example, many object to the idea of short-term policy interventions around income inequality because they worry about prioritizing individual consumption over beneficial societal investment. This is the perennial concern that income transfers disincentivize workers and come at a cost of reduced investment (as the marginal dollar that was earmarked for public infrastructure, education, or health care is redirected toward income transfers), which ultimately hurts the economy and the wider community at large.

Yet there is a real problem when the lower income strata in society cannot see a way to better themselves. In the past 30 years, for example, the probability has declined by more than half that a man born into the bottom 25 percent of the income distribution in the U.S. will end his life in the top 25 percent. Declining social mobility and worsening prospects for better incomes and an improving economic future for many families has shaken the underpinnings of the American dream. This in turn has undermined the stability and even legitimacy of the wider political and economic system.

4. The global consequences of slow growth

How, and whether, policy makers can create sustained economic growth is the fourth complicating factor in the income-inequality debate. Inasmuch as economic growth is needed to raise incomes, the prevailing global economic malaise offers little reason to be sanguine about improvements in income inequality in the foreseeable future.

There is a real problem when the lower income strata in society cannot see a way to better themselves.

Across emerging economies, where 90 percent of the world’s population lives, there are clear signs that economic growth has regressed below the 7 percent needed to double per capita incomes in one generation. Moreover, in many developing countries growth has stalled below the point where we can meaningfully continue to put a dent in poverty.

For example, many of the largest countries with populations of at least 50 million people, such as Brazil, Russia, and South Africa, are all growing significantly below the 7 percent threshold, and are in some cases contracting. For many such economies, the drag in economic growth is a direct consequence of declining global trade and falling demand for commodities they export, which in turn reflects slower growth in developed economies.

In the aftermath of the financial crisis, the world’s developed countries, including the U.S., continue to suffer under the weight of high debts and deficits, eroding quality and quantity of labor, and declining productivity. And capital, labor, and productivity are the three key engines of economic growth. In line with these deleterious trends, economic growth forecasts for advanced economies have stalled.

This worsening global economic picture has negative consequences for income as well as political inequality both within and between countries. Unfortunately, it will be a central characteristic of the world the new president faces. Widening inequality, whether income or political, provides fodder for political unrest, as the disaffected can see their prospects for better living standards and political freedom decline. After all, it would be foolhardy to expect that citizens can, over long periods of time, live cheek by jowl—the rich “haves” next to the poor “have-nots”—while the prospects and living conditions of the latter continue to deteriorate.

Widening inequality, whether income or political, provides fodder for political unrest.

Emerging evidence and trends make this issue even more urgent. A January 2016 Oxfam report highlights that the 62 wealthiest people in the world own as much wealth as the poorest half of the world's population. The 2015 “Forbes 400”—a ranking of U.S. wealth that lists the country's richest billionaires by their estimated net worth—revealed that with a combined worth of $2.34 trillion, the group owned more than the bottom 61 percent of the country combined.

Meanwhile in New York, the wealthy Upper East Side enclave (with median personal earnings of $60,000) borders the Bronx, the country’s poorest congressional district, where median personal earnings hover around $18,000. The U.S. Census Bureau found that approximately 38 percent of constituents in the Bronx district lived at or below the federal poverty line.

Such an enormous wealth divide can have a tremendous impact on political and social stability as well as on economic growth and prosperity. For instance, a recent IMF report argues that labor challenges and severe income disparity could lead to “a retrenchment from globalization and the emergence of a new type of fragile state.”

5. What the new president can do: technology as a solution

One need only look around the world—at the populist movements manifest in “Grexit” (the possibility of Greece leaving the European Union), the recent UK referendum vote to leave the EU (“Brexit”), and the U.S. presidential race, as well as political dissatisfaction in France, Germany, Spain, and elsewhere—to see the impact of widening income inequality and worsening social mobility on politics, the economy, and society as a whole.

The key to success lies in providing access to better education, infrastructure, and health care while developing new and innovative policies that maximize the potential of technology.

Reducing inequality requires clear, measurable, and specific solutions. For the next U.S. administration, technology offers a critical and key path to addressing the income-inequality challenge in an innovative way. In particular, technology advancements should be catalysts to tackle income inequality in at least two ways:

• Technology platforms such as the Internet and mobile phone applications can reduce entry barriers for individuals, enabling them to start and grow businesses. The incoming administration can capitalize on the advent of the digital age by keeping the regulatory burden and path to entry low and supporting a technology environment that fosters business development and job creation, which in turn raises the prospects of income and earnings for many millions of Americans. This path is particularly important since, at over 75 million strong, millennials (who have been born into this technology age) now represent the largest generation in the U.S. Technology and tech-based opportunities offer a path to generate incomes and ultimately reduce income inequality.
• The new administration should also use technological innovation to help small- and medium-sized businesses access capital. Such enterprises are the lifeblood of the American economy. The Small Business Entrepreneurship Council reports that as of 2013, small firms accounted for 63 percent of the net new jobs created in the preceding 20 years. Moreover, since the recession, small firms have accounted for 60 percent of the net new jobs, with firms with 20–499 employees leading the job creation. Yet in a recent survey of small business owners, Wakefield Research found that 70 percent of respondents reported “bureaucratic red tape” as hindering the growth of their business. Over 90 percent of the respondents also agreed that “the government should provide better resources to ensure that small businesses can get the capital they need.” The new administration thus has an opportunity to change the worsening income-inequality trend. By supporting technology-based crowdfunding—for example, by offering federal matching grants for funds raised through such initiatives—government can use technology to help small- and medium-sized businesses access the capital they need to drive the business growth, job creation, and income gains that together can reduce income inequality.

For the next U.S. president, the stakes surrounding income inequality are high. Reducing income inequality is an urgent and critical step in solving the social ills facing the world today. The key to success lies in providing access to better education, infrastructure, and health care while developing new and innovative policies that maximize the potential of technology to reduce inequality and enhance social mobility.

First Year Project

This essay is part of the first year project, dambisa moyo, key takeaways.

• Understand that simply relying on pure forms of free-market capitalism will not reduce income inequality
• Acknowledge the inadequacy of traditional left/right policy solutions
• Explore both short- and long-term solutions to the challenge of income inequality
• Realize that growing income equality across the world is driving a retreat from globalization
• Embrace technological platforms to help individuals start businesses and access capital

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