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A progressive tax is one for which the rates vary according to one’s ability to pay. Thus, those who possess more highly valued economic assets, such as property or income, are taxed at a higher percentage than those whose economic assets are valued less.
Historically, progressive taxes were exceptional in that they were aimed at an elite class that was often exempt from paying certain taxes. In ancient times, progressive taxes were often associated with extraordinary circumstances, especially military campaigns. Republican Rome’s tributum is an example of a war-related progressive tax.
Progressive taxation became a norm in the modern period with the emergence of a direct relationship between the state and individuals in society. The increased demands of modern states to raise revenue from individuals led to the introduction of citizenship, which brought enhanced political and legal rights to the individual and greater obligations of the individual to the state. These obligations included new revenue claims, such as personal income, capital gains, and inheritance taxes. These individual-based taxes form the basis of a progressive tax scheme, which is applied at ascending rates relative to the economic value of the targeted assets. The United States’s personal income tax was meant to be progressive, with top marginal rates reaching above 90% in the 1960s.
The progressive tax was created as a fiscal means by which political authorities gained greater access to the economic resources of the wealthiest members of society. The arguments in favor of progressive taxation stress a sense of social fairness in that the wealthier members of society have a disproportionately higher ability to pay for those public goods and services from which they benefit, directly and indirectly. These arguments are associated with the ideological programs of political populism and socialism. By contrast, the arguments against progressive taxation stress a sense of individual fairness in that those with wealth are being penalized for their personal ingenuity, risk taking, labor, and luck. These arguments are associated with the ideological programs of free-market capitalism and neoliberalism.
In the advanced industrial economies, progressive tax systems went into place incrementally in the late nineteenth century. By the mid-twentieth century, they reached their limits with extremely high marginal rates and the spread of the progressive tax burden to the middle classes. This tax policy practice caused unintended negative consequences, including a rise in tax avoidance and capital flight and a decline in economic productivity and growth. Progressive taxation was viewed critically less as a fair means of allocating the tax burden and more as an unfair means of reallocating wealth. In the late twentieth century, a political reaction was led by Margaret Thatcher, the Conservative prime minister of the United Kingdom, and Ronald Reagan, the Republican president of the United States, who began a reverse trend to ease the tax burden on the wealthy with tax reforms of a more modified progressive and even regressive character in the advanced industrial economies.
Bibliography:
- Griffith, Thomas D. 2004. Progressive Taxation and Happiness. Boston College Law Review 45 (5): 1363–1398.
- Slemrod, Joel, ed. 1994. Tax Progressivity and Income Inequality. Cambridge, U.K.: Cambridge University Press.
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