Progessive Taxation Explained in 8 Briefings

Friday, October 19, 2018 - 14:39

After nearly five years, ActionAid has wound down its successful Tax Power global campaign. But despite racking up a lot of accomplishments, there is much left to be done and tax remains a key focus area for us. 

As we shift our work on taxation more to the national level, we have decided to put greater emphasis on the need for genuinely progressive taxation. That means tax systems that not only generate sufficient public revenue, but also distribute the contributions fairly and serve to bridge economic and gender inequalities. Tax policy and tax systems are decided nationally, though global influences, such as the influence of the IMF and other international financial institutions remain important. 

The progressivity of national tax systems determines whether small farmers, slum-dwellers, women, and other marginalised groups over-contribute to national tax revenues, by comparison with the rich and powerful. Tax justice, while determined by economic policies, is fundamentally political and a central concern for anyone working for social justice.

That’s why we’ve published a series of briefings on progressive taxation, which can be used at the local, national, regional, and global levels.

What is progressive taxation?

Progressive taxation means higher tax rates for those with higher income or more wealth, so that those who earn or have more are taxed at a higher rate. Personal income tax, based on graduated scales where the tax rate goes up as income level rises, is probably the clearest example of progressivity. Regressive taxation means the poor pay a greater proportion of their available resources than the rich. Consumption taxes which employ a flat rate are the clearest example of regressive taxes. 

Taxes can be made more progressive with well-designed scales, exemptions and thresholds (on who earns or has enough to pay a particular tax). What matters for the overall progressiveness of a tax system is the mix of different types of taxes and the rates applied to them. A mix of progressive taxes such as those detailed in these briefings, with high rates and relatively low-rated consumption taxes, is likely to produce a more progressive overall system. 

ActionAid’s briefings on progressive taxation

Our briefings cover both generally-regressive taxes that can and should be reformed — consumption taxes such as value-added tax (VAT)excise taxesinternational trade taxes, and taxes on the informal sector — and taxes that are usually progressive: property taxcapital gains tax and other wealth taxes (such as inheritance tax). In each briefing, we offer a working definition of the type of tax, a discussion of its current application, an outline of its challenges and benefits, examples of how it has been used, and recommendations for how it could be reformed and/or better implemented. 

The need for increased tax revenue

As governments, especially in developing countries, struggle to pay for their various activities, the need to increase tax revenue has become generally accepted. ActionAid is most concerned to see that gender-responsive public services (GRPS), including health care, universal public education, provision of safe water, provision of safe public transport, and more get the funding they require. The Sustainable Development Goals (SDGs) developed by the UN for its Agenda 2030 aim for sharply reduced inequalities but are dramatically under-funded, to the tune of trillions of dollars, and domestic resource mobilisation (with tax at its centre) has been repeatedly highlighted as the key to sustainable and democratic financing. We also need to track the way governments spend the tax revenue they raise, to make sure they contribute to reducing inequalities through better-quality and broadly accessible public services and equitable development. While that is beyond the scope of these briefings, it is another pillar of ActionAid’s work. 

How taxes are raised matters

How should essential tax revenue be generated? Different types of taxes can have different impacts on businesses, labour markets, and the environment, as well as economic and gender equality. 

VAT and other consumption taxes such as goods and services taxes (GST) and sales taxes are increasingly relied upon, especially by developing country governments, despite increasing evidence of their regressivity and disproportionate impact on women.

At the same time, the world has become increasingly aware of the massive scale of corporate tax avoidance and tax evasion by corporations and wealthy individuals, which severely undermine revenues from corporate and personal income tax — both generally very progressive — effectively shifting the balance of contributions towards those earning less.

Because the impact of various taxes depends on the national and local economic and social contexts, there is no one-size-fits-all solution for a progressive tax system. But governments should ensure that their tax systems contribute to greater gender and economic equalities rather than undermine them.

Kasia Szeniawska contributed to these briefings and article.