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Countercyclical Taxes at a Glance

Countercyclical Taxes at a Glance

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Countercyclical Taxes at a GlanceThe cyclical system of the state and local government income taxes is the most specialized means of rendering income taxes fair for taxpayers. The percentage of income deducted from someone's wages at the state level ebbs and flows with the boom and bust of the business cycle. All cyclical taxes follow the mathematical law of direct proportions. This is a fiscal policy that lawmakers may choose to stimulate revenue flow and market demand. The income tax is considered cyclical because state and local income tax revenues are lower during a recession period. Lawmakers can choose a countercyclical fiscal policy to stagger inflation and intervene in the economy. Property taxes are not considered cyclical because real estate is considered an inelastic commodity.
If a countercyclical tax policy is chosen, state income taxes are generally raised during recessions because states do not wish to cut vital government services. By nature, governments do not like to turn profits and spend whatever budgetary surpluses, during economic boom periods, on new services. Governments expect new services to be perpetual. As a new service becomes older, it becomes more popular. Therefore, the political ramifications of cutting services becomes politically unpopular as well. If a state legislature chooses to adopt countercyclical fiscal policy, they are more likely to cut services. However, this poses a political dilemma because neither raising taxes nor cutting services is ever popular. Therefore, law makers constantly manipulate cyclical taxes, like the income tax, in accordance with the business cycle.
Countercyclical fiscal policies also apply to economic boom periods. As the economy booms, taxes decrease for everyone because there is enough revenue for the government to provide its services. Generally, as the economy weakens, taxes rise as a result of decreased revenue.
Law makers further manipulate cyclical income taxes by making them progressive or regressive. Changing  the progressiveness or regressiveness of income taxes is like shifting a car into lower gear while stuck in a ditch or keeping it in high gear when cruising. Depending on political philosophy, income taxes may go in either direction. One thing is for sure, countercyclical fiscal policy changes in accordance with the business cycle. These fiscal policy changes generally depend on who the public blames for economic decline. Lawmakers are constantly gauging how the public reacts to countercyclical fiscal policies in economic turmoil because these moves may be politically risky.  If the public blames the rich for economic meltdown in a historically regressive income tax climate; the income tax becomes more progressive. The opposite is also applicable. During economic boom, the progressiveness or regressiveness kept as the status quo of income taxes.
Other countercyclical taxes like the sales tax can be manipulated why increasing the rate in periods of economic crisis in a state, county, city or town. Tolls may also be raised to preserve vital government services. The extent to which rates change depend on the public's reaction to changes in tax laws.


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