Tax Reform in Open Economies

Tax Reform in Open Economies

International and Country Perspectives

Edited by Iris Claus, Norman Gemmell, Michelle Harding and David White

The eminent contributors (including Altshuler, Creedy, Freebairn, Gravelle, Heady, Kalb, Sørensen and Zodrow) investigate the beneficial directions for medium-term tax reform in the light of global developments and lessons from the latest taxation research. In addressing this issue, they review recent advances in both the theoretical and empirical tax literature and reform evidence from individual countries. Topics covered include the impact of taxes on economic performance; international and corporate taxation; personal tax and welfare systems; environmental taxation; and country-specific tax reform experiences.

Chapter 7: Personal Income Tax Structure: Theory and Policy

John Creedy

Subjects: economics and finance, financial economics and regulation, public finance, public sector economics


John Creedy* INTRODUCTION 7.1 If asked for practical advice about taxation, economists for many years would have referred to Adam Smith’s (1776) famous four maxims (contribution according to ability to pay,1 certainty, convenience, and ‘efficiency’ − the latter including administrative costs, distortions to activity, and the ‘vexation and oppression’ involved). While the list of such criteria was extended and clarified,2 in the discussion of ability to pay it is clear that there was no acceptance of a redistributive role.3 An explicit preference for equality of treatment via proportional taxation was made most clear in the often-quoted remark by McCulloch, the author of the most extensive and systematic treatment of public finance in the classical literature. McCulloch (1845, p. 142) argued that ‘The moment you abandon the cardinal principle of exacting from all individuals the same proportion of their income or of their property, you are at sea without rudder or compass, and there is no amount of injustice and folly you may not commit’. The appropriate tax rate is thus determined by the independently given revenue requirement.4 The main change in the approach to taxation came from the later integration of public finance into the general area of welfare economics, which was itself a major concomitant of the successful introduction of a utility maximising approach to exchange in the 1870s. However, the most systematic early developments came from Cohen-Stuart (1889) and Edgeworth (1897) in investigating the broad implications for progressivity of the utility maximising principle, in the context of...

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