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In Theory

Regressive taxation is bad when it is applied to income. It is so because it extracts the most taxes from low income people to provide for all people, including rich ones. Those who earn the least must support the government and those who earn the most. It is obviously unfair because it is not equitable.

Regressive taxation is not black and white when it is applied to sales. It depends as to what is taxed and what other choices taxed people has. A specific good may have a flat tax on it, but if it is purchased mostly by poor people, it can be considered regressive. A typical example is alcohol and tobacco; poor people consume much more of it than rich people. It also has to do with substitution. If items cannot be substituted, for example groceries such as milk and bread, when a household income rises, they continue to pay the same taxes.

 Regressive Taxation


In Reality

The degree of damage inflicted by a regressive system depends of the taxation level. If it is high, then poor, middle class and rich people are robbed of capital to an alarming rate. Less capital means less savings, less investment, less economic activity and therefore lower standards of living. It is irrelevant if poor people pay proportionally more than rich people do. The issue is the amount of money syphoned out by the government. It is such that produces a significant damage.

On the other hand, if the taxation level is low, then the amount of money extracted from the market is also low. This allows for a stronger economy which increases everybody’s standards of living. Furthermore, since rich people are taxed proportionally less than poor people, they can invest more and hence produce higher economic growth. So, paradoxically, at low taxation levels a regressive taxation scheme is more beneficial than a progressive one!

Of course, we must not forget that any type of taxation will have a negative economic effect. A low regressive taxation level is still a taxation level and as such, it will produce a less than maximum economic activity, which means, a less than maximum standard of living.



In Theory

Let’s analyze this tax. It is quite simple. Everybody over the age of 18 pays a fixed sum of money. This money is not proportional to their incomes or property values. Simple, fair, reasonable, right? Some options would include minimum non-taxable incomes or other minor variations. As with the previous tax, these variations do not affect significantly our logic; therefore, we will analyze the simplest fixed tax.

The advantage of this type of tax is its simplicity. Very little is required from the government in terms of bureaucratic organizations to determine compliance and persecute and prosecute evaders. It is a fairer tax than any other.

Fixed Taxation


In Reality

Flixed taxes are certainly appealing in “democratic” terms. If governments are truly democratic, then they must enact a fixed tax per person. It is quite simple, One person, one vote, one tax. However, they don’t do it. Or, at least, they don’t try to do it too often. Thatcher, the UK prime minister, tried it in 1990/1991. It blew up in her face.

If you take into consideration that the total amount of revenue that the government wants must grow or at least remain constant, this means that this fixed tax will be quite high. If the government collects 1 million pesos from a rich person and 10,000 pesos from each 100 poor people, they receive a total of 1,010,000 pesos. With a fixed tax they will have to collect 1,010,000 pesos from 101 people. This means that each one will have to pay 10,000 pesos.

Again, before the fixed tax, 100 poor people paid 100 pesos each. Now, after the flat tax, 100 poor people will have to pay 10,000 pesos each!

This is patently ridiculous because it is literally taking away from people their means of subsistence. It is not just money; it is their life the government would be taking away.

For this type of tax to work, the tax levels would have to be lowered to the maximum amount that the poorest person can afford to pay.

Alas, this would mean massive reductions in government spending. Obviously, this is wishful thinking. There is no way that politicians will commit political suicide by actually taking a good decision that will massively hemorrhage votes.

But the story does not end there. With a high fixed tax in place the government will be forced to persecute and prosecute all tax evaders, which will be a gargantuan task at an astronomic price because of the massive levels of evasion.

Furthermore, it is very likely that total revenues would still be dropping which would force the government to print money. High inflation is in the horizon, can you see it?

Note: please see the Glossary if you are unfamiliar with certain words.

Continue to Taxes And Myths - Part 5


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