Economists, tax policy experts, and behavior scientists all have theories about the advantages and disadvantages of a progressive tax system. Seldom is a political issue so divided as it is with tax policy. The few things that everyone agrees on is that tax systems are universally unfair to some and too complicated for most people to comprehend.
The first disadvantage is that capital flows to where it can earn the greatest return. In a progressive tax system, that means if the amount of tax is more significant than the potential return on investment, the money flees to where it has the most significant potential upside. Corporate taxes are a good example. The second disadvantage flows from the first. If corporations are no longer investing capital in one country and reinvesting it elsewhere, then the production capabilities are also moving. Jobs go as well, further reducing the tax base paid by individuals.
A third disadvantage is that progressive taxes and government spending go hand in hand. As long as politicians think there is an unlimited supply of taxes, they continue to spend, leading to taxes being used on wasteful, if not meaningless, benefits to most individuals. A fourth disadvantage relates to politicians. Politicians demonize wealthier citizens (who pay most of the progressive taxes in the United States), creating a class system which divides society politically and socially. The fifth disadvantage again involves politicians. Politicians manipulate the progressive tax system, providing tax breaks to some companies and individuals. In contrast, they penalize others to pick the winners and losers in industries they favor or dislike.
Another disadvantage is the way wealth passes to the next generation. In a progressive tax system, taxes such as inheritance and taxes on wealth passing to the next generation is so distorted out of proportion that the next generation has to liquidate assets to pay the tax. Countless family-owned businesses, like farms or production facilities, have been forced out of business because they cannot pay the progressive tax imposed on the next generation inheriting the business.
The seventh disadvantage is that a progressive tax system discourages people from working. Given a choice between working longer and harder to earn more money, which pushes a person into a higher tax bracket (in some instances earning less after taxes) or remaining on government assistance, a person may choose to be less productive. The eighth disadvantage is the perception that progressive taxes are inherently unfair. In the United States, one fundamental principle everyone agrees on is that we should all be equally treated in the eyes of the law. Why should I be legally obligated to pay a higher rate because I earn more than someone earning less? How is that equal treatment under the law?
The ninth disadvantage is that progressive tax systems don't generate as much income as other systems—say, a flat tax rate system, for example. In a flat tax system, everyone pays the same rate regardless of income, and there are no tax credits or tax deductions. In a progressive tax system, the tax code is so loaded with tax breaks and deductions only available to the rich or corporations that it is possible an average income earner pays more personal income tax than a millionaire. That is undoubtedly true in corporate taxes (see Amazon ).
The tenth disadvantage is that a progressive tax system aims to redistribute income from wealthier individuals to the less affluent. In a capitalist system, there is something philosophically wrong with income redistribution. Forced income redistribution stymies innovation and investment, reduces the amount of money invested in charities, and foments a mistrust between employees and employers.