Tax policy, therefore, has historically been referred to as either progressive or regressive. Regressive tax policy extracts money disproportionately from the lower income classes. Progressive tax policy extracts money in direct proportion to income class or – in its extreme – disproportionately from the higher income classes. An overall progressive tax policy is generally thought to lead to the healthiest economy.
In today’s political discussions, conservatives argue for regressive taxes and liberals argue for progressive taxes. When taxes are progressive, the government collects more tax money from upper income classes and re-distributes it to lower income earners through various government programs. This money then flows back into the economy. When taxes are regressive, the government collects more tax money from the lower income classes and then re-distributes it, often in the form of decreased tax rates for higher income earners.
Now, where do these two income classes get their money? The lower classes get theirs from economic activities and the government redistribution efforts. The upper classes get their money from the economy. If the tax system is progressive, upper income class monies tinkle downward in the form of government subsidies. If the tax system is regressive, money floats upward through upper income reduced tax rates. In both instances, money moves upward or downward because of government actions, not because of economic activity. The actions of the economy determine how much money moves. The actions of the government determine in which direction the money moves.
When money floats to the surface, it does so very efficiently. When money sinks to the bottom, it does so very inefficiently through a myriad of government programs. One could say, therefore, that only a few coins out of every dollar sink to the bottom, while the big money – the paper money– floats to the surface.
Power follows money and when money is in the hands of a few individuals, we lose creativity and diversity of thought. Our government becomes more authoritarian and less democratic. Yes, in a capitalistic economy, money must be in the hands of the lower income classes because that is where the spending that drives capitalism takes place. For example: There are only so many cars that the few very rich can purchase. Therefore it must be economically possible for the masses to be able to purchase cars. If that does not happen, the automobile industry implodes.
The capitalists, however, don’t seem to understand that. They would rather see money float to the top via regressive tax rates. They fail to understand that only the coins drop to the bottom but paper money floats. Thus, when the overall direction of money flow is to the top, the economy slows.
If corrections are not made, there is a natural tipping point in each economy or society when the money flow ceases to be important. Then either the economy tanks or society itself undergoes a massive – often chaotic – change.
Which will it be next time?