Highly progressive tax systems entail disincentives for private economic activity and, thus, may hamper potential growth. Nevertheless, attempts to introduce alternative tax schedules regularly encounter significant political resistance. The aim of this paper is to widen the understanding of the determinants of individual attitudes toward progressive taxation and, therefore, the assessment of the political feasibility of tax reform proposals.
Conventional political-economic theories usually explain redistributive preferences based on a narrow self-interest calculus. These theories however do not offer a rational for the fact that in many industrial countries the majority of voters seem to prefer progressive tax rates. In order to provide a comprehensive analysis of the determinants of individual attitudes toward progressive taxation, our analysis is not confined to pure self-interest but also introduces fairness aspects (e.g., fairness preferences, economic beliefs and fairness assessment of the status quo).
Our empirical analysis is based on the representative data from the German General Social Survey (ALLBUS) for the year 2000. Next to information on the respondents' tax rate preferences, this survey offers valuable data on a wide range of individual fairness considerations as well as objective data on the respondents' socioeconomic characteristics.
The empirical findings indicate that the individual attitudes toward progressive taxation are not only driven by the corresponding self-interest. Furthermore, fairness considerations play a major role in the formation of tax rate preferences: Persons without strong preferences for a distribution of (financial) means according to the need-principle, who do stress the relevance of individual effort for economic success and judge the present income distribution to be fair are less likely to demand higher tax rates for high income earners than for low income individuals. The finding that individuals do not necessarily choose the tax system that is most beneficial to them but also care about its fairness has important policy implications: A successful selling of (growth-enhancing) tax reforms should address this fairness related concerns as well.
Heinemann, Friedrich and Tanja Hennighausen (2010), Don't Tax Me? Determinants of Individual Attitudes Toward Progressive Taxation, ZEW Discussion Paper No. 10-017, Mannheim. Download