Home Regressive Tax Understanding Regressive Tax

Understanding Regressive Tax

Understanding Regressive Tax

The
regressive tax is the opposite of the progressive tax. The regressive tax is an income tax system
based on the economic classification of the rich, middle, and working
socio-economic classes. The regressive tax classes use similar criteria to
deciding who falls into whatever category based on gross income of an
individual or married couple. Since the 1980s, the regressive system of local
income taxation has increased in usage. This trend is primarily based on the
premises of Reaganomics. Reaganomics assumes that the private sector should be
the engine of wealth and therefore, the tax burden should be decreased on the
wealthiest members of society. The wealthiest members of society are assumed to
be those who run small or large business with an inherent desire to expand
their enterprise with desperately needed capital to expand their employment.
The regressive tax is widely believed to be an engine of job creation in an
economy.

The regressive tax in local taxation is a response to the economic slumps of
the 1970s. The 1970s marked the time in which the American economy transitioned
from a primarily industrial economy to an economy focused on the service
sector. During the 1970s, the economy was characterized with stagnant job
growth combined with monetary inflation- this trend would create the economic
buzzword of the day: stagflation. Some economists argue that stagflation was
caused by a lack of liquid capital in the market combined with a growing
welfare state that typified the Johnson administration’s “new society”
programs. The other side of the argument argues that stagflation was not the
government’s fault and stagflation was caused by the economic disruption of the
fuel crisis that resulted from OPEC’s response to Israel’s victory in the 1973
Yom Kippur war and the West’s tacit support for the victors.

With international events, federal government policies, and economic polemics
aside, by the 1980s, it was clear that public adored the idea of the regressive
tax essential to the economic paradigm of Reaganomics. Proponents of the
regressive tax touted the rich’s ability to expand the economy during the
subsequent boom years of the 1980s. Local taxation reflected national income
tax policies, in the meantime, the wealth of the rich expanded and this wealth
created a flood of credit by which the middle class could benefit with bank
loans. The regressive tax was considered the primary explanation of the rapid
expansion of America’s gross domestic product as the end of the Cold War. Some
go as far as to argue that the regressive tax was why America “won”
the Cold War.

The boom years of the 1990s were arguably the triumph of the regressive tax
when more state and local governments mirrored the tax policies of federal
government. States that kept their income taxes progressive had slower economic
growth than the states who adopted regressive taxes. The progressive tax was
considered the policy that resulted in economic stagflation and urban decay
that embodied the housing projects of New York and Los Angeles, both of these
states kept their income taxes relatively progressive. The regressive tax is
the quintessence of the neo-liberal economic theory the Chicago school of
economics endorsed. Regressive taxes freed up allowed the Federal Reserve bank
to slash interest rates to create the credit necessary to expand the housing
market in many states. State governments were pleased with the regressive tax
because the new home construction meant more revenue from property taxes. The
regressive tax also created the   optimal conditions for Wall Street
to financially innovate and give home-buyers incentive to invest in the real
estate buyer’s market that characterized the last quarter century.

Unfortunately, the regressive tax did nothing to slow down inflation. The cost
of living in all American states increased during this period, thereby
decreasing the purchasing power of the dollar. Regressive taxes decreased the
availability of liquid capital for the lower echelons of socio-economic totem
pole, causing savings to plummet. This forced lower and middle class Americans
had lower local taxation but more private debt. Some economists argue that
employment increased during this period as a result of the expansion of the
telecommunications industry and has little to do with reductions in federal and
local taxation for the rich.

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