The new Spanish Government has just enacted a set of tight measurements aimed to keep down the public deficit. Ok, nothing unexpected, this was within the script regardless of wich party won the November 20th’s ellections, which eventually were the Conservatives (as expected, too). However, one of the measurements has raised particular discontent due to not having been announced by the governing party during the ellectoral campagin: the heavy rise applied on the personal income tax. This controversy becomes stronger when the case of progressiveness is discussed, i.e., when it comes to the question of whether or not the taxation rate increases sufficiently or not as the level of income does. Let’s keep aside the debate regarding the effectiveness of increasing the personal taxation due to its detrimental impact on the household consumption (thus on that component of the GDP), which is a tremendous but a separate debate, and let’s focus on the progressiveness issue. To gain a quick insight, formerly the (marginal) taxation rates ranged between 24 and 45% (intermediate rates at 28, 37, 43, 44%) for income levels comprised between 17,000€ and 300,ooo€. Now the new rates range between 24,75 and 52% (30, 40, 47, 49, 51%). Is the new scheme progressive enough (not in general, but in the context of the current, overwhelming crisis, this is a critical point on the question)? In other words, does it call for additional efforts to people in accordance to their wealth in order to 1) issue a message of social justice in such tough times as those of these days, 2) keep the middle class alive? I personally believe this is not the case. And I am not the only one.
Nobel Prize Paul Krugman recently argued that “super elites” must pay “much more taxes”, as the traditional claim that high taxes for the rich discourage successful and smart people to continue to create innovations which eventually bring wealth to the entire society is esentially propaganda from the same people who try to get rid of high taxes. Likewise other outstanding scholars suchs as Emmanuel Sáez (University of California at Berkeley) or Nobel Prize Peter Diamond (MIT) go even further and dare to quantify on the basis of their research how much the richest should be taxed: 70% (marginal) of their income. This figure can sound astonishing (at first sight, even to me) but it must lead to us questioning our tradional thinking on this topic.
One might be tempted to neglect these views just because they are supported mostly by academics, and stick to the “classical” beliefs that the rich should be taxed smoothly so that they keep the incentive. However, such classical beliefs are not necessarily better grounded than the new ones. As an example, many “wise men” argued just very few years ago that housing prices could never go down by any means (the classical belief), and to a great extent this was the arrogant assumption where this all began…
