Should higher earners pay a higher rate of tax?

[LabourLover]

I have a problem with the underlying assumptions relating to DMUI. I don't think its as cut and dried as the theory suggests. have a look at
http://law.bepress.com/cgi/viewcontent. ... xt=usclwps
and let me know what you think.

I haven’t been able to read this link yet. I can’t open it in work; I’ll try at home over the weekend.

i think it (the model, not the predictions of the model) should not be used as a means of justifying or advocating an increase in tax.

i think the example you use is a little simplistic. substitute heroin for donuts in the example and you will have increasing marginal utility. the question is whether an individuals appatite for donuts are similar to that of money. given that money is a medium of exchange i contend that it is not.

It is a simple example, but it clearly shows the idea. Actually, from heroin addicts’ position, you still would have diminishing marginal utility. Also, I think the idea is as relevant for money as it is for donuts (as was going to call them gravy rings in the example, but then I realized only northerners would understand. Ahhh, gravy rings). If someone with an income of €100 a week gets an extra €10 per week, then this would give much more satisfaction to that person than to a person who earns €1000 per week.

i agree that some form of redistribution of wealth should occur. i'm not sure that the most expedient way is to tax the hell out of high earners while letting corporates and property escape with minimal taxation.

As well as high earner being taxed more, I do agree that there should be some form of property tax. Probably the easiest way to do this initially would be a tax on second homes, this should also ease the problems first time buyers have.

The example you use is a perfect one to prove that increasing tax can have negative effects on an economy. if tax take (rem that consumption and tax are functions of income) increases, then in a closed economy, consumption and savings/investment spending fall. you state that if the govt spends its tax (i.e. rise in G offsets the rise in bT) then the effect of the economy is nil.

Actually, this example shows that if the government spends all the revenue raised by a tax increase, then income would rise. This is because government expenditure would rise by the increase in T, while the increased taxation would only reduce expenditure by the b times the increase in tax. As the marginal propensity to consume (b) is less than 1, autonomous expenditure must increase. Of course, this is a simple example and I agree that any tax rise will have other impacts.

i contend that an increase in G and increase in bT will adversely affect the economy by denying entrepenuers the opportunity to grow business. in effect, the government competes for available income with shop keepers (Co) and entrepeneurs (I). i've a feeling that this is an unwinnable argument as it all depends on your appetite for govt intervention.

I do think that governments should be careful in how they apply taxes, but I think its clear looking at the Nordic countries (much beloved by all lefties like me), that countries taking a large proportion of national income in tax can still have very successful economies.

i agree that tax should be progressive however i think that we should be careful as to where we place the burden. we do not want to drive away innovation and entrepenuerial zeal. at the moment earned income (case 1 and schedule E etc) is taxed at higher rates than unearned (case 5, CGT,CAT etc)

if you were "king for a day" and could change the current taxation system, what would you do? (Michael1965 and RockofCashel, i'm interested to hear your ideas too!)

Off the top of my head, I’d find out the impact of the different tax breaks and stop those that offered no economic or social benefits, I’d introduce a minimum tax rate so that there was a limit to extent to which people could avail of tax breaks, I’d lower VAT, and I’d introduced some form of property tax. And I’d abolish VAT entirely on all cycling equipment (I’d just like to be buy more myself ) 8)

And one more thing, I was oringally going to use gravy rings in the example instead of donuts, but would anyone know what I was talking about?

[LabourLover]

Say there are 100 taxpayers in the country and 98 of them earn Euro 100,000 per year. That's a very tidy sum, and they would probably be very comfortable with that. Now say the other two earn 1,000,000 per year. This theory would decree that the two high earners should hand over around 90% of their income so the whole country earns the same 118,000 euros, thus maximising utility. But do the other 98 deserve or even need this generosity?

Quite apart from that question there is the question of whether the two high-earning tax payers will continue to do whatever work it is that pays them 1,000,000 a year. Sure what's the point if they face a 90% marginal tax rate?
Should they then withdraw their labour in the face of punitive taxes, community utility is reduced as not only do these two men not get to enjoy the utility of the extra income, but the economy is deprived of the positive linkages involved in the work of these men, e.g. ordering from suppliers, spending take-home pay on goods and services, etc.

I agree that there are occassions where maximization utility is not appropriate. Sometimes the outcome would not be seen as fair or it could lead to other problems. But that does not stop maximizing utility from being something to be aimed for on most occasions.

[brianarundel]

I don't have a masters in economics - let alone a B.A. - but I feel I can throw my 2 cent in.

I favour a flat income tax rate, which I believe would be more in line with the canons of (wise) taxation outlined by Smith.

The present system isn't equitable (why should the person who earns more pay more? - I've never understood the logic behind people suggesting they should). Nor is the present system (or any hikes proposed for the system) economic - a flat income tax would reduce bueracracy. Nor is the system fully certain - it seems sometimes you need to be a qualified accountant to work out your taxes (perhaps why tax accountants have such a thriving profession)*. And, most importantly, the taxation system shouldn't be a disincentive to work; any hikes in the taxation on high wage earners would make the system a burden on production (a simple argument that someone already righty pointed out).

*ok, admittedly a hyberbolic point

Bet you can guess which way I voted...

[TheOmbudsman]

I don't have a masters in economics - let alone a B.A. - but I feel I can throw my 2 cent in.

I favour a flat income tax rate, which I believe would be more in line with the canons of (wise) taxation outlined by Smith.

The present system isn't equitable (why should the person who earns more pay more? - I've never understood the logic behind people suggesting they should). Nor is the present system (or any hikes proposed for the system) economic - a flat income tax would reduce bueracracy. Nor is the system fully certain - it seems sometimes you need to be a qualified accountant to work out your taxes (perhaps why tax accountants have such a thriving profession)*. And, most importantly, the taxation system shouldn't be a disincentive to work; any hikes in the taxation on high wage earners would make the system a burden on production (a simple argument that someone already righty pointed out).

*ok, admittedly a hyberbolic point

Bet you can guess which way I voted...

Yes Brian...I agree...welcome back