Does Progressive Taxation Really Help the Poor?

Let’s assume there are only two countries in the world – A and B – as described below. Then let’s try to predict which one will be better off.

A taxes the income of its inhabitants. Every person is required to pay 10% of his or her income to the government.

B taxes the income of its inhabitants. Every person is required to pay a percentage of his or her income to the government. Those with higher incomes pay a higher percentage, the highest being 50%. Those with lower incomes pay a lower percentage, the lowest being 0%.

Let’s assume A and B are identical in every respect except for their taxation rates. This includes the assumption that total taxes raised are identical in the two lands.

The stage is set.

Now let’s introduce a person. We’ll call him W. Let’s suppose that this person is skilled in creating profitable businesses and that he has enough wealth to finance the creation of a business. He’s not necessarily the best entrepreneur in the world, but he’s up there. Most people do not have his skill.

Where will W choose to live?

If W lives in A, he will have to pay 10% of his relatively large income to the government. If W lives in B, he will have to pay 50%. W will choose to live in A.

Now let’s introduce another person. We’ll call him X. Let’s suppose that this person has no remarkable skills, is constantly broke, and prefers to live on government handouts rather than to work for a living. Most people are not this lazy, but some come close.

Where will X choose to live?

If X lives in A, he will have to pay 10% of his meagre income to the government. If X lives in B, he will have to pay 0%. X will choose to live in B.

There are many other variables not considered above, so we can’t say that all the highly skilled people will move to A and all the slackers will move to B. However, there will be a trend in that direction. How strong a trend depends on those other variables, but the trend will exist.

Our conclusion: Progressive taxation (the highest earners pay a higher percent) drives the highest earners out of the country to some degree. And it attracts the lower income earners.

Ultimately, as W, X, and everyone like them migrate to their most suitable environment, A’s population will become more skilled and B’s population will become less skilled. A will have higher employment and B will have lower employment. A will thus become richer and B will thus become poorer.

Our conclusion: Progressive taxation works against the country, and thereby works against the poor.