The after-tax income is 900 (1000 – 10%) and 1800 euros (2000 – 10%) respectively. The income gap goes from 1,000 euros before tax to 900 euros after tax. This type of tax does not change the relative inequalities: the difference goes from 1 to 2 before taxes (2,000 euros against 1,000 euros) and after taxes (1,800 euros against 900 euros). In France, most of our taxation works as follows: this is the case with the generalized social contribution, social contributions, value added tax or those on fuels or cigarettes. Social contributions are proportional to income; VAT is proportional to consumption.
The progressive tax reduces the relative differences
The third form of levy is called “progressive”. We speak of “progression” because the rate of levy increases with the value of what is taxed. This is particularly the case with income tax. The tax rate increases with income. There is the use of the taxfyle.com/small-business-tax-calculator for the perfect calculation.
The progressive tax reduces both absolute and relative inequalities. If you deduct 10% on income of 1,000 euros and 20% on income of 2,000 euros, you obtain, after tax, the income of 900 euros and 1,600 euros, i.e. a ratio that goes from 1 to 2 before taxes to 1 to 1.8 after. The justification for this type of levy is old. The classical eighteenth-century economist Adam Smith favoured it for a simple reason to understand: when a person earning 1000 euros receives an additional 500 euros, they are more useful to him (they cover basic needs) than the additional 500 euros.
- Earned by the one who already receives a million (this is superfluous). The second can more easily do without it than the first. Put another way, the “faculties” to contribute to the expenses of the State – to use the term of Article XIII of the Declaration of the Rights of Man and of the Citizen of 1789 – increase at the same time as income. It is both fairer and more economically efficient to tax those with lower incomes at a lower rate.
What lessons can we learn from all this?
In practice, the flat-rate tax has almost disappeared. The progressive tax represents only a very small part of all taxes. Only income tax, solidarity tax on wealth (only real estate) and inheritance tax work in this way. They represent less than 10% of the total withdrawals. The wealthiest categories, more taxed, are fiercely opposed to this type of levy. During the Glorious Years, the highest rate of income tax exceeded 65%, it was gradually reduced to 45%. Our taxation is essentially proportional, either to income (general social contribution and social contributions in particular) or to consumption (VAT).
An informed debate on taxes should focus on three parameters
First on what is taxed (the base): should income, consumption, property, and income from the property be taxed? What types of income, consumption or wealth? In France, taxes are being put in place and a large number of mechanisms are created to avoid paying taxes (“tax loopholes”). Taxation becomes both illegible and unfair because only the wealthiest can and know how to use these niches. Second, what shares should proportional and progressive taxes have? Is it fair that the latter only represent a very small part of the tax system? Finally, we consider that a euro earned by a poor person has the same value as a rich person.
