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Understanding Regressive Tax

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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