First of all, two definitions used by economists:
- Normal goods: these are goods or services that see an increase in demand when incomes rise. Most goods/services are normal goods.
- Inferior goods: these are goods or services that see a decrease in demand when incomes rise. These goods/services include cheap clothing.
You want to know another normal good? Leisure.
Inferior good? Work.
That means that, as incomes rise, the less you are willing to work harder. People often work harder at lower incomes because they gain more from an increase in incomes than someone already on a higher income. Example:
It's coming up to Christmas, and a firm has seen an unpredicted rise in demand for their good. In order to match this demand, they need to increase output, which means they need to increase labour. The firm approaches two employees about over time, one currently earns £40,000 the other earns £80,000 - both of them are above the upper tax bracket.
The firm says that if the employees do the overtime, that they'll receive a £1,000 bonus at the end of the year. To the guy on £40,000 that represents a 2.5% increase on his wage, to the guy on £80,000 that represents a 1.25% increase on his wage.
Who's going to be more willing to accept the overtime?
And thus, I propose that progressive taxation will keep people working hard as the extra money will mean more to them than at a higher income.
What's more, increased work means increased output in an economy, which will mean that there's an increase in the aggregate supply of all goods and services - resulting in less inflationary pressure, keeping prices down. Also, countries with higher incomes tend to have higher current-account deficits because the increase in wealth means you're more likely to import things (no one in the country is willing to work harder because they have high wages, and so the necessities have to be imported from elsewhere).
And, of course, the increased taxation revenus can lead to increased Government investment to help improve the economic output of an economy.
