Taxation and Inequality in Canada and the United States: Two Stories or One?

Canada and the United States have both experienced a substantial increase in income inequality over the last several decades. In this article, we examine the complex interaction of income inequality with tax and transfer systems in Canada and the United States. We begin by comparing the data on taxation and expenditure to understand the similarities and differences between the two countries. We then consider how changes to tax and transfer policies have affected the levels of inequality in both countries. The article concludes by offering some policy recommendations that each country may consider to address the increasing levels of inequality

Taxation and Inequality in the Americas: Changing the Fiscal Contract?

Times change. In the words of an old English ballad, some things seem to have “turned upside down” in recent years. Since 2000, Latin America has become less unequal, with lower levels of poverty and likely greater economic mobility (Lustig, Lopez-Calvo and Ortiz-Juarez 2012), assisted in part by more progressive fiscal policy (Mahon 2012). In contrast, the United States has become more unequal (Piketty and Saez 2003, 2013), while poverty has remained relatively constant (U.S. Census Bureau 2012), economic mobility has likely declined (Hungerford 2008), and tax and spending policies have become less effective in reducing inequality (Harris and Sammartino 2011). This paper examines whether the tide has really changed in Latin America or in the United States, and, if it has, what may lie ahead for these two regions of the Americas? Do recent events portend fortune or misery? Although the primary cause of the more equal income distribution in Latin America is probably the sharp increase in growth and employment following the challenging political and economic decade of the 1990s (Gasparini and Lustig 2011), fiscal policy played at least some role. Indeed, recent Latin American experience suggests that the pessimism prevalent since the 1970s about the extent to which taxation can affect income distribution has perhaps been misguided. Economic, social and political changes can and do give rise to new norms and power configurations, which sometimes result in important changes in the social and fiscal contract underlying governance structures

Taxation and Inequality in Canada and the United States: Two Stories or One?

Canada and the United States have both experienced a substantial increase in income inequality over the last several decades. In this article, we examine the complex interaction of income inequality with tax and transfer systems in Canada and the United States. We begin by comparing the data on taxation and expenditure to understand the similarities and differences between the two countries. We then consider how changes to tax and transfer policies have affected the levels of inequality in both countries. The article concludes by offering some policy recommendations that each country may consider to address the increasing levels of inequality

Dual Income Taxation and Developing Countries

The dual income tax combines a progressive tax on labor income and a lower flat rate tax on income from capital. Denmark, Finland, Norway, and Sweden adopted dual income taxes to address a set of tax challenges that arose in the late 1980s and early 1990s. Although developing countries face much different economic, political, and tax environments from the Nordic countries, the dual income tax may be the right solution to the different set of challenges facing many developing countries. Providing separate tax rates for labor and capital income allows countries greater flexibility in addressing tax competition while retaining progressive tax rates for labor income. A dual income tax regime may also allow developing countries to rationalize the taxation of income from active business operations under the personal and corporate tax systems and the taxation of passive investment income under the personal tax system. Developing countries could also use the move to a dual income tax system as an opportunity to make broader reforms in their personal, corporate, and payroll tax systems. Finally, recent tax reforms in Russia, Ukraine, and several countries in Central and Eastern Europe have led to flat tax regimes that generally apply a single tax rate to all types of income above some zero0bracket amount. We contend that a dual income tax may provide policymakers in developing countries with an attractive alternative that addresses tax competition concerns while maintaining a progressive tax on labor income

Tax Reform and the American Middle Class

This essay examines how concern for the economic plight of the middle class should influence debates over federal tax reform. It begins with an overview of data on two key developments in American economic life over the past quarter century. The first is the deteriorating economic position of the middle class, a long-term trend illustrated by stagnant income growth, job polarization, and more limited economic opportunities as compared to earlier eras. The second development is the declining federal tax burden of the American middle class, including historically low average tax rates and relative tax shares, not just for the federal income tax but for all federal taxes combined. The reduction in middle class tax burdens was not the result of a well-conceived, comprehensive plan, but rather the result of numerous unrelated tax changes designed to remove the poor from the income tax rolls, convert welfare into “workfare,” lower taxes for families with children, and provide political cover for tax cuts for the wealthy. The juxtaposition of these two empirical developments presents policymakers with a dilemma in crafting tax reform proposals, especially those designed to address the country’s long-term fiscal imbalance through increased revenues. One approach would be to address these challenges exclusively through increased tax burdens on the wealthy while maintaining (or continuing to reduce) middle class tax burdens. While the impulse to pursue such a strategy is understandable in light of the economic vulnerability experienced by middle-income households, this approach also carries with it several costs, including a likely erosion in the fiscal viability of federal spending programs designed to provide income security for low- and middle-income households. In recognition of these costs, the essay considers an alternative strategy of increasing middle class tax burdens (as well as those of higher income households) with an eye toward ensuring the long-term fiscal viability of federal social safety net and other programs aimed at promoting economic mobility. This latter approach calls for less progressive taxes (perhaps even regressive taxes) to support more progressive spending programs