How common are discontinuous tax rates? And why would any nation have them?
December 6, 2012 1:38 PM Subscribe
I had previously thought nonflat taxes were all marginal, but to my surprise the UK Stamp Duty Land Tax
doesn't use marginal rates at all. Are there other taxes like this? And why would a nation implement taxes this way?
posted by jackbishop to Work & Money (10 answers total) 3 users marked this as a favorite
Marginally-implemented tax rates are widely misunderstood but seem to be the most common way to implement nonflat taxes. I teach mathematics, and have for years used the construction of income tax as a peicewise linear function to illustrate both continuity as a concept and as a desirable property for taxes (since you don't want to create perverse incentives to fall on one or the other side of an otherwise meaningless line). Since I took it as axiomatic that this was a good thing, I was shocked to learn that the UK's land transfer tax doesn't use marginal rates at all, and just has sharp discontinuities at £125,000, £250,000, £500,000, £1,000,000, and £2,000,000. This apparently affects real estate prices in the UK in the way you might expect, with prices piling up on the lower side of these lines. So, seeing as how this has been an element of my teaching, I have two big questions about this practice:
* Is it used anywhere other than in this one particular UK tax? I'd really never heard of any modern nation doing this.
* Is there a particular goal it seeks to achieve -- e.g. does the government of the United Kingdom have some sort of compelling interest in disincentivizing particular real-estate prices?