Income Inequality and Progressive Taxation

Tax is a difficult subject to approach because people don’t like paying it. This is understandable, but a mistake, because as a general rule the more tax a country collects the better off the people. They are also generally happier, except for the tax, which has led to a serious public debt problem. The issue here is that people like to vote for politicians who promise more and better government services and lower taxes, despite the obvious contradiction.

  Voting for reduced taxes is particularly dumb if you work in the public sector. If you are a government worker—nurse, teacher, police officer etc—then you are paid from tax revenue, so if tax revenue goes down so does your pay. The next time you hear a politician promise to reduce taxes ask yourself what you would rather do, earn 80K a year and pay 20K income tax, or 100K a year and pay 30K income tax. Then ask yourself why you have been voting for the first one. If we want good quality public services then we have to pay for them. Healthcare and education are two of the most important public services we have, so we should fund them well.

Even if you’re not a government worker then the chances are you have been voting against your best interests with regards to tax cuts. In a free-market economy, wages are determined by market forces rather than what the work is really worth. The result is that people whose vocation is of the humanitarian type are generally underpaid, and those who work in the corporate and finance sectors can earn absurd amounts of money. This may be justified under free-market rules, but it is not socially responsible. If you want society to benefit the most from its workforce then incomes should attract the smartest and best workers to the areas that provide the most benefit to society, like healthcare, teaching and research, not those that can cause the most damage, like financial speculation.

To address the issue of pay inequality most countries employ a progressive income tax, where tax rates increase the more you earn. This helps, but it only partially offsets the disparity, and many countries have been dismantling this system with tax cuts that favour higher incomes.

In Australia, despite a progressive income tax that starts at zero and tops out at 45%, the overall tax system is only slightly progressive. The bottom 20% income bracket pay around 22% of their income in tax, while those in the top 20% income bracket pay around 27% of their income in tax, a difference of just 5%. When we take out-of-pocket expenses for public goods and services into account, which are effectively a tax, then the situation is even worse.¹

Putting a child through a public school in an Australian metropolitan area, from preschool to year 12, can cost as much as $120,000. This is a significant financial burden on parents, especially if they have several children attending school at the same time.²

A progressive income tax is not just a fairer system, it is better for both the economy and society. Studies have shown that the ideal top income tax bracket, providing the best outcomes of economic growth, entrepreneurial incentive, and social benefit, is at least 70%, and probably above 80%. Neoliberals claim this would impede economic growth, justifying tax cuts to the rich with the claim that doing so will stimulate the economy. America had a top tax rate of 90% during the 1950s and 1960s, and it was still 70% in 1980, and the economy was fine back then.^{3, 4}

The erosion of the progressive tax system is only part of the problem. The other is the growth in income inequality. During the first two decades after WWII incomes in the US increased proportionally, but this came to an end with the neoliberal era. Analysis of Internal Revenue data by David Johnston found that while overall income, when adjusted for inflation, had increased by 27% from 1979 to 2004, only the top 5% experienced a significant increase, with a third of the increase going to the top 1%. Those in the 60-80% income bracket saw their real income increase by a mere 2% in this 25-year period, and the bottom 60% suffered a decline of 5%.⁵

According to a RAND Corporation study by Carter Price and Kathryn Edwards, if income in the US had increased from 1975 to 2018 as equitably as it did in the first two post-war decades, the bottom 90% of US workers would have been earning an extra $2.5 trillion a year. The study found that, had this happened, someone earning $35,000 per year would be getting $61,000, and someone earning $70,000 per year would be getting $120,000-$130,000. This equates to an extra $500 and $1,000 per week.⁶

Although this ‘wage theft’ was legal, the rich used their wealth to pass the laws that made it so. If the bottom 90% want to reverse the situation they can use their numbers to change the law and get the money back.

References

1. https://taxpolicy.crawford.anu.edu.au/sites/default/files/uploads/taxstudies_crawford_anu_edu_au/2016-11/progressive_varela_feb_2016_complete.pdf – Progressive tax in Australia.
2. www.abc.net.au/news/2025-01-15/australian-families-struggling-to-afford-their-kids-education/104814986 – Public school out-of-pocket Australia. 
3. Diamond, P. Saez, E. “The Case for a Progressive Tax: From Basic Research to Policy Recommendations” Journal of Economic Perspectives 25, no 4, 2011, p. 165-90. Piketty, T. Saez, E. Stantcheva, S. “Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities” NBER Working Paper 17616, 2011.
4. www.bradfordtaxinstitute.com/Free_Resources/Federal-Income-Tax-Rates.aspx – History of Federal Income Tax Rates: 1913 – 2024. Piketty, T. “Capital in the Twenty-First Century” Harvard University Press, Cambridge, Massachusetts, 2014, p. 498-514, 638. https://data.worldbank.org/indicator/NY.GDP.PCAP.KD.ZG?locations=US – GDP growth per capita US 1961-2024. https://fred.stlouisfed.org/series/NYGDPPCAPKDGBR – GDP growth per capita UK 1960-2024.
5. Johnston, D. C. ‘2004 Income in US Was Below 2000 Level’ New York Times, November 28, 2006, p. C-1.
6. www.rand.org/pubs/working_papers/WRA516-1.html – $2.5 trillion a year in 2020, $67 trillion 1975-2026.