The appropriate and fair manner to distribute the burden of taxes has been a contentious topic in policy making. The academic literature has established different approaches to shed light concerning tax progressivity. The analysis done by Diamond and Saez explores the outcomes of the optimal tax model in formulating policy recommendations. The theory dictates that the tax system must maximize on the social welfare directive subject to government budget constraint taking into account how people respond to transfers and taxes actively. The study explores different taxation setups in developed and underdeveloped nations to support the usage of the progressive tax system.
The variables utilized in the survey include the change in the rate of taxes, the number of individuals, and their average income. The Pareto parameter is used to come up with a formula that shows the revenue gathered from the progressive tax system. The revenue is provided as t and it is found using the formula N(Zm-Z) whereby N is the number of people, Zm is the average income, and z the cut-off income. The rate of revenue or tax (t) is maximized by taxing the high-income earners or top taxpayers. The aim of the marginal rates being to reduce the amount paid by the low-income earners raising their standards of living and closing the gap between the wealthy and the poor (Diamond and Saez, 6).
Optimality is crucial in taxation. The survey compares two communities with the progressive and regressive tax system regarding the government’s access to adequate revenue to support public spending in both accounts. The authors make three vital policy recommendations. One is that the high earners should be subject to incremental marginal tax rates on their income. Secondly, the low-income households should be encouraged to utilize the earnings subsidies. Lastly, capital income should also be taxed. The research presents a solid case for the need to incorporate a progressive tax system to enhance economic development especially for underdeveloped nations (Jeske and Kitao, 220).
Works Cited
Diamond, Peter and Saez Emmanuel. The Case for a Progressive Tax: From Basic
Research to Policy Recommendations. Cesifo Working Paper No. 3548. Category 1: Public Finance, 2011.
Jeske, Karsten and Kitao, Sagiri. U.S. tax policy and health insurance demand: Can a regressive policy improve welfare? Journal of Monetary Economics. Volume 56, Issue 2, Pages 210–221. 2009
