Progressive Taxation and Equal Sacrifice

Equal sacrifice is an elaboration of the idea that a rich person should pay more in taxes than a poor person because the former feels a given monetary loss to a lesser degree. A general method is proposed for testing whether a tax schedule exhibits equal sacrifice relative to an isoelastic utility function. The coefficient of risk aversion in the utility function, the level of sacrifice at each income level, and the tax function that would be implied by equal sacrifice are estimated using data on US income tax schedules over the period 1957 to 1987. During this period, the income tax underwent several substantial reforms. The top bracket dropped from 91% in 1957 to 38.5% in 1987 to 33% today. It is found that, in spite of these shifts, the distribution of the tax burden is explained quite well by the equal sacrifice model in most years. The post-1986 tax reform schedule is a notable exception. A possible explanation for the UK and US' deviation from the equal sacrifice model is that the schedule resulted from tax reform in which great importance was attached to reducing the number of distinct tax brackets.