Progressive & Regressive taxes describe tax tables, not a political opinion. They are mathematical functions. In a progressive tax, the more you earn, the higher your tax rate. In a regressive tax, the less you earn, the higher your tax rate. The classic progressive tax is income tax. The classic regressive tax is sales tax.
Combined with this tax theory and these examples, a great deal can be deduced about economics and politics. Because most people are involved in preparing their progressive federal income taxes, it is fairly well understood. And because most people are not involved in calculating their regressive taxes, they are fairly poorly understood. So we will concentrate on explaining regressive taxes, and how the two combine to make up our system, and most systems of taxation.
All known functioning systems of taxation have a balance of progressive and regressive taxes. This idea is almost never debated, the debates are over where the balance point should be, how much burden should be on the Arich@, and how much burden on the Amiddle@ and Apoor@. In a progressive tax, the more you earn, the higher your tax rate. In a regressive tax, the less you earn, the higher your tax rate. Progressive taxes soak the rich, regressive taxes soak the poor.
An example of why sales tax is regressive.
Let=s imagine two frugal traveling salesmen. They each have to buy a new car every four years to keep up appearances, and they need reliable transportation. (One guy makes 20K, the other 300K). Run the numbers on the RATE of total income each pays on 5% sales tax. Poor Boy buys a $20,000 car pays $1000 or 5.0% of his income. Rich Boy buys a $60,000 car pays $3000 or 1.0% of his income. Poor Boy has 5 times the tax bite, or rate of tax on a car. Rich Boy hardly feels sales taxes. Then run the numbers on a $30 pair of Levi=s, and the tax-rate discrepancy triples. Sales tax is NOT a flat tax.
Let=s look at other examples of regressive taxes and fees. Most per-unit taxes are regressive. For example, in real estate, a $1,000/yr per lot assessment fee is not uncommon in some areas (for things like fire and sewer, etc). That=s a fair chunk for a $200,000 home, hardly nothing for a $2,000,000 home in the same assessment district.
Complications
These have a moral or arguable aspect. Groceries, drugs and some necessities are rarely taxed for moral reasons because of a compounding problem found with the truly poor that has to do with disposable income. That is a family that earns less than $25,000, has almost none. They may be forced to spend say, 25% of their income on groceries, no choice. A family earning $100K hardly feels the grocery bill in comparison. This is because even a family that earns say $50,000 has potentially $25,000 disposable if they chose to live as cheaply as the $25K family. This could be funneled into tax shelters. And Rich Boy often chooses to spend most of his money in ways that avoid sales taxes, such as on his gardener, nanny, pool cleaner, chauffeur, accountant, lawyer, and other labor-based services, as well as his European vacation and any investments. Poor Boy has no such choice, his income must go to taxable consumer goods. These complications amplify the Apure@ qualities of regressive taxation theory.
Follow the money. Why should the rich pay more? Some say, for the same reason John Dillinger robbed banks: because that=s where the money is. There is some logic to that, the richest 2% control in the ballpark of 40% of the private wealth in the USA. Others say, Abecause they can afford it.@ Others who complain about progressive taxes say it=s because people want Arevenge on the rich@, or it=s Aclass envy@. Or they say, AWhy should the successful people be penalized?@ That is an interesting take on reality.
But there is one argument that is not often seen, the Afollow the money@, or follow the tax money argument. Simply put, it says you get what you pay for. It says that if you eat a gourmet meal, you have purchased an entirely different meal (not just more of it) than for a McDonald=s Happy Meal.
We claim that progressive taxes buy Rich Boy toys, regressive taxes buy Poor Boy toys. We say fair is fair. To test this idea, we follow the tax money. Progressive taxes (such as income taxes) pay mostly for Rich Boy toys: Desert Storm, Cold War, gunboat diplomacy, the Fed=s infinite labor pool (WANTED: unemployment) and any related poverty, NAFTA, GATT, free trade agreements, interstate freeways, national parks, FBI, CIA, a hot-shot standing military, etc. And regressive taxes (mostly local sales taxes and fees) go for Poor Boy toys: local roads, hospitals, schools, local parks, libraries, cops, city/county councils, fire fighting, etc. If Atoys@ sound too flippant, feel free to swap with a term that rings true for you, such as Atools of the trade@, or Aeconomic infrastructures.@
Perhaps taxes are like any other transaction,bundled. When you buy a set of tires or a meal at a restaurant, you are paying for employee theft, drunk employees, security, air-conditioning, accountants, and stupid business moves, etc. that you may disapprove of. All are bundled into the cost of doing business and it=s not on your invoice. There is no free lunch. Some say that the American meal is the best meal in the world. If you have eaten of it, pay your debts, and don=t try and sneak out the back door.
The tricky balance of money and power.
Taxes are also used to tune the economy. One of the main functions of taxation is to balance the flow of money between the employer and the employee. This keeps the money from accumulating on one end or the other and crashing the economy or altering the basic structure of democratic capitalism as we know it. For example, many people argue that in the late 1970=s the employees had too much power and money. Their wages were outpacing inflation and they were paying off their debt with little dollars. And that now in the 1990=s via the great redistribution of wealth caused by cutting taxes for the wealthiest in half, and Afiring the unions@, some argue that the employers have too much power and money. History will tell. What is tricky in this balance is that the power follows the money and the money follows the power. So when the economic scale starts to tip, it tends to accelerate. It=s very sensitive.
Taxes are also used in other ways to direct the economy. For example, if the government feels that a certain direction is in the national interest, tax shelters may be opened in that direction. This could be of benefit to compensate for the market=s well known shortsightedness and directionlessness caused by its preoccupation with short-term gains. (Ten years is not a long time.)
Beware of the so-called tax cut. The tax cut is a funny way of managing a household. It=s like deciding that you are spending too much money, so you ask your boss for a wage cut. Perhaps the best way to stop spending too much money is to stop spending too much money. What an idea! Fix or cut the wasteful programs. Sometimes a tax cut is not really a tax cut. That=s because there is no free lunch. If a needed program is blindly defunded, then the money has to come from somewhere. Often if it=s a federal program that is defunded, the slack is taken up by local (largely regressive) taxes.
What we have is not a tax cut, but a tax shift, from the Rich Boys debt onto the Poor Boy=s shoulders. In 1996 a federal across-the-board Atax cut@ was popular in certain circles. Here is how cutting progressive (income) taxes might have affected you: If you made 36K, Dole’s 15% Acut@ takes $320/year less from you. But if local sales taxes edge up 1% to make up, you just lost money. Beware of the free lunch. While most Rich Boys don=t want the Poor Boys to shoulder their debts, keep in mind that for many of the very Rich Boys, that’s part of their job. That’s just simple economics.