When taxes aim high

Stephen Gordon questions the effects of taxing the rich.

What becomes more problematic is just who will bear the burden of those taxes – or, in the language of public finance, what is the incidence of increased income taxes on high earners? The ostensible targets of the UK bonus supertax were high-earning bank employees, and since they bore the statutory incidence of the supertax, they did indeed pay more taxes. But since they were able to obtain increases that left their after-tax incomes untouched, they weren’t left out of pocket by the measure: the economic incidence was passed on to shareholders, other employees and bank customers – in short, everyone except the original target. If the goal of the bonus supertax was to reduce the gap between high earners and the rest of the income distribution, it’s hard to see how it could be considered a success.

Greg Fingas questions Gordon’s analysis.

Even if we assume that every dime of any personal income tax increase will be passed along to shareholders and employees, that doesn’t negate the fact that more money is indeed being collected in taxes through the personal income tax system than would be gathered through other taxes applicable (whose rates have been slashed in the name of promoting business interest). And so the worst we can say about a high top-level personal income tax is that it’s not clear how much will actually be redistributed from the absolute top end into public coffers, and how much will instead come the not-quite-top end. 

Which means that even on Gordon’s account, there’s reason to think a tax targeted toward top-end income earners would indeed both reduce inequality, and provide added funds for social priorities. And if the worst-case scenario is to shine a spotlight on executive capture of wealth which leads to corporate governance being dealt with more seriously, then that’s hardly a result we should want to avoid.

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