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Another version, focused on Ireland, was presented at a conference of the Foundation for Fiscal Studies, Trinity College, Dublin, in November 1993. The views expressed in the paper are those of the author and not necessarily those of the Fund. The author appreciates many thoughtful comments received from Ms. Adrienne Cheasty and Messrs. Wabel Abdallah, Julio Escolano, Ved P. Gandhi, David Nellor, John Norregaard, and Alan A. Tait which helped in clarifying many parts of the paper. Remaining errors are, however, the responsibility of the author alone.
Interestingly, however, an OECD (1981) study showed that, in the late 1970s, the top rate-generally in the vicinity of 50-80 percent-was typically applicable to less than 1 percent of taxpayers (see Table 3 of the study).
He does, however, report some cross-country variation in attitudes toward top rates.
A cautionary note may be needed here, that may have merit in the current context of how to better tax the well-off. Not infrequently I hear of cases of malfunctioning or stalled implementation of redistribution programs through the expenditure side of the budget. These may relate to poor training programs for the disemployed; difficulties in the identification of vulnerable groups and consequent abuse of welfare benefits; delays or nonreceipt of the right kind of aid in poverty programs; and so on. It is true that working through the expenditure side makes the finances more transparent. Nevertheless, it is not a guarantee for good programs as seems to have been presumed. Are we shifting the problem of redistribution too much to the expenditure side alone?
If the tax benefits accruing from the deductions are to be truncated at upper income levels, then deductions are best transformed to tax credits.
For example, it could be argued that an individual’s ability to change work intensities-at least in upper income groups-is so constrained in the short run that one cannot expect to measure much change. However, younger cohorts could well decide to “vote with their feet,” and perhaps the figures on “brain drain” could be partially attributed to overtaxation.
As was indicated in Section II, however, the evidence is not clear regarding disincentive or evasion effects.
We are approaching 1994. Therefore, instead of going back to the beginning of the 1980s, I thought it would be more illuminating to focus on the latter part of the last decade, beginning with 1985 or 1986 depending on the availability of data for particular countries. The composition of the sample also reflects, to some extent, availability of comparable information.
In Table 2, the Latin American countries are divided into two groups: (1) South America, and (2) Central and North America since, in some of the latter, high inflation and other factors blow up the numbers. The conclusions remain similar, however, for both groups. It is also worth noting perhaps that, in general for Latin America, the choice of particular years tends to affect the range of values presented, reflecting the effects of varying inflation and other factors.
See also Shome (1992) for similar trends for a wider time-span, 1980-90, for Latin America, which reasserts this trend.
Of course, it is not possible to achieve vertical equity without having designed a tax system that is horizontally equitable. The concern over high income earners relates at least in part to the tax treatment of high wage and salary earners versus the professionals who could flexibly manage their “benefits packages.” There has been some success in recent years toward taxation of nonwage benefits and minimum taxes, etc.
There exist examples of good management in the updating of property values for state and local property taxes in the United States, Property values are annually updated on the basis of published sale prices of real estate. The system works remarkably smoothly and does not seem to be based on complicated procedures.
Nevertheless, note should be taken to acknowledge its possible long-run effects on resource allocation and, hence, to attempt to confine its use as a temporary “bridge” toward achieving equity.
See, for example, OECD (1988), pp. 48-53, for a list of commodities already subject to separate excises or higher rates than general consumption taxes. Apart from the usual three-beverages, tobacco products, petroleum products-taxed items include furs, jewelry, electronic goods, perfumery, and confectionery.
The continuing evidence that, in most countries, the pay-as-you-earn (PAYE) sector tends to account for the bulk of personal income tax revenue already indicates the prevalence of horizontal inequity.