Chad Perrin: SOB

11 February 2008

progressive and regressive taxes

Filed under: Cognition,Liberty — Tags: , , , , , , , — apotheon @ 12:54

I’m sure many of my readers have heard the terms “progressive tax” and “regressive tax”. I know I’ve run across them enough to suspect I’m not the only one that hears these terms used in vain.

Most people who use these terms don’t know what the hell they’re talking about.

In general, I tend to hear the terms “progressive” and “regressive” used by left-wingnuts in a pejorative fashion. “Regressive” is pejorative in the obvious, direct manner; “progressive” is pejorative in the “everything sucks except us” sense.

  1. Progressive tax gets used to refer to taxes that take more resources from the rich and fewer resources from the poor. The term is used in this fashion to promote a positive view of a given system of taxation, in much the same way that left-wingnuts refer to themselves as “progressive”, as though being a leftist is the only way one can be counted among the allies of “social” progress.
  2. Regressive tax gets used to refer to taxes that take more resources from the poor (as a percentage of the total resources of such people). The term is used in this fashion to promote a negative view of a given system of taxation.

These are not technically accurate uses of the terms. In truth:

  1. Progressive taxation is a system of taxation wherein the amount of levied tax grows with the taxed value.
  2. Regressive taxation, by obvious contrast, is a system of taxation wherein the amount of levied tax shrinks with the taxed value.

The other side of the coin of pejorative use of these terms is the definition of wealth. Wealth tends to get defined by left-wingnuts in whatever manner is most convenient for them at a given moment when trying to mount a rhetorical attack against some class of people. The economic definition of wealth, however, is the total value of resources available to a given entity, including real estate, property, and money.

Thus, by definition, an income tax that is strictly progressive is one that taxes income progressively — not wealth. A regressive transaction tax is one that, by definition, taxes transactions regressively — not consumption, and certainly not wealth.

A transaction tax will, within very limiting low-wealth constraints, tend to be measurably regressive as regards wealth — but that entire tendency pretty much evaporates at wealth levels that make subsistence a non-issue. There are effective minimum expenditure rates for subsistence, and as wealth increases the effect of these rates on total wealth approaches zero — it is only at the lowest levels of wealth that such subsistence expenditure rates can provide an effectively wealth-regressive taxation rate.

(Note that “transaction” or “transfer” taxes comprise a class of taxation that targets real estate title transfer, sales, gifts, inheritance, and other such property title transfers.)

Transaction taxes have a slightly stronger tendency toward a regressive relationship with income, but even this is a very limited relationship that applies only at the lowest levels. As with wealth, there is a “soft” ceiling on how much income growth is affected regressively by transaction tax levels — only below some sustainability line of income level can a transaction tax really be measurably regressive, because subsistence requirements do not grow with the level of income. Because “income” broadly encompasses wealth aggregation, and transaction taxes substantially encompass wealth expenditure, the tendency toward a regressive relationship to transaction taxes is somewhat stronger than in the relationship of such a tax with wealth; wealth in and of itself is measured as a snapshot, ignoring matters of income and expense. Thus, wealth itself is not as strongly tied to the tax in terms of determining progressivity or regressivity because there are many other factors involved.

In either case — wealth or income — however, other classes of expense tend to make up the lion’s share of allocation of resources above levels substantially dominated by subsistence requirements. This is why the whole notion of a transaction tax having a generally measurable regressive relationship with either income or wealth entirely falls apart beyond very limited, poverty-level scope. Furthermore, greater wealth (and, less directly, greater income) generally encourages more investment in income generating properties — which, in a non-broken system, would translate to greater transaction costs (and, thus, to greater susceptibility to the effects of a transaction tax). The end result might be that a middle class would be least susceptible to the effects of proportional transaction tax rates relative to total wealth and/or income. I might address this in more depth later, but I’ll give you a hint now as to why that is:

As income increases, savings rates tend to decrease, because the need for specific savings decreases.

A proportional tax is a tax that is neither progressive nor regressive with regard to its targeted value. This would, in essence, involve nothing more complicated than coming up with a single percentage and applying it evenly across the board.

As such, if you want to avoid a wealth-regressive or income-regressive tax, but at the same time want to avoid punishing productivity, and simultaneously avoid the tremendous bookkeeping costs of trying to manage a true wealth tax, you could do much much worse than a proportional transaction tax. Obviating the regressive tendency of such a tax at the lowest level would require nothing more than an annual transaction tax discount card — much less paperwork and bureaucracy necessary than the current progressive income tax system requirements. Such a tax discount could simply eliminate any and all transaction taxes below a given income level, based on the previous year’s reported income.

. . . and whether you disagree with that or not, please don’t use the term “regressive” to refer to a transaction tax as though the very concepts were indivisible.

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