Monday we did an analysis of that of value added tax and one of the things I mentioned
during that is that that taxes are effectively regressive.
They result in richer people paying a lower percentage of their income to a VAT tax.
And we talked in detail about how even when you exempt some staples and put a higher VAT
on luxury goods, it still ends up being regressive, although sometimes less regressive than other
times.
This raised a new series of questions from people in the audience about regressive versus
progressive taxes.
So what I want to do today is dig right in and talk about this.
There are three types of taxes.
You can have a regressive, progressive, or proportional tax.
Now, what's important is that sometimes just because something is called one thing doesn't
mean it is that in reality, and we'll get to that.
A regressive tax has a greater impact on low income individuals.
A progressive tax has a greater impact on higher income individuals.
The more you earn, the more you pay.
Uh, in terms of a, a rate and proportional taxes apply, uh, to the, uh, to all incomes
at the same rate, the same percentage.
So some examples of regressive taxes include the real estate property tax.
If you look at the real estate property tax, it tends to be the same regardless of the
value of a property.
If you consider the financial situation of someone who has $100,000 property versus $1
million property versus a $10 million property, the fact that that tax is the, is a, a, a
flat rate means that it will in practice be regressive.
Uh, as income goes up.
An excise tax on consumables like gasoline or airfare, taxes are effectively regressive.
And we'll talk about that.
Social security tax withholdings are regressive because they are income caps.
You pay up until you earn whatever amount it is that the cap is.
It's around 128,000 right now, I believe.
And then once you get beyond that, you no longer pay the social security tax, meaning
that the more you earn, the lower your effective social security tax rate is.
Those are regressive taxes.
Some progressive taxes include, for example, the income tax.
There are, uh, uh, uh, marginal tax rates that increase as you earn more money.
Now in practice, this is less clear.
It very often the very, very, very rich, like the 0.1% will pay a lower effective tax rate
than the 1% because of a variety of different loopholes and mechanisms that exist to reduce
tax liability.
But at least in theory, the income tax federally is a progressive tax.
The estate tax is a progressive tax, um, a bunch of, uh, of a state.
Um, inheritance is exempt.
And then you start to see estate taxes come in.
And then lastly, there are some proportional taxes.
So example of a proportional tax would be like a state income tax.
In Massachusetts there is a 5.3%, maybe 5.35, something like that, 5.3% state income tax.
And that applies regardless of income.
It is one rate.
It is a proportional tax.
Now the most important thing to consider, a lot of this is pretty clear.
The most important thing to think about is how a tax that seems proportional can actually
be regressive in practice.
So think about a gasoline tax.
Gasoline tax might mean we're making the numbers up.
Everybody pays 10 cents a gallon, poor people pay 10 cents a gallon.
Rich people pay 10 cents a gallon.
This is effectively a regressive tax.
It affects the poor more than the rich.
Think about it this way.
If everybody drives roughly 10,000 miles a year, just because you have more money doesn't
mean you necessarily drive more.
In fact, sometimes rich people drive less because they live closer to where they work.
And there's other reasons.
But imagine everybody drives roughly 10,000 miles a year.
Um, the rich maybe have cars that, uh, uh, use, consume more gas, but very often they
don't.
Uh, older cars tend to consume more gas.
Poorer people have older cars.
Let's again, imagine everybody drives 10,000 miles a year and has a car with roughly similar
gas mileage.
Everybody is paying, let's imagine 250 bucks a year in gasoline taxes.
Well, if you are in 25 grand a year, you've paid 1% of your income to gasoline taxes.
If you earn $250,000 a year, you've only paid 0.1% of a gasoline tax.
So it's important to consider whether a tax that sounds proportional is really proportional.
There are a lot of proportional seeming taxes that are actually regressive taxes.
And again, anytime we talk about policy in this way, we are not making any kind of assessment,
at least in this segment about what is the best or worst type of tax.
We need to understand the policy types and the tax types to then be able to ask the normal
questions that you would when you want to figure out how you want to tax, uh, a society
and economy.
What kind of behavior do we want to reward or disincentivize in society and in the economy?
When we think about fairness, what is fair in terms of contribution to society?
Should everyone pay the same percentage?
Should people pay on the basis of their ability to pay?
Should those who have more greatly benefited from the commons, uh, pay back into the system
a larger share of their income?
These often are economic questions combined with philosophical questions, ideological
questions, political questions, moral questions.
In many ways, we're not doing any of that today.
All we're doing today is pointing out the different of taxes that exist, how attacks
can seem one thing and actually be the other.
And then the last thing about this that I think is important to mention when you have
a tax, but then you have ways to circumvent it.
You have to consider that in your analysis of whether it is actually progressive, regressive
or proportional.
The best example is we did this data last year.
Uh, we did this in 2019 based on 2018 data.
You actually see that at the very top incomes.
Even though on paper we have a progressive tax code at the very, very high end, you see
tax rates, effective tax rates often go down because of the mechanisms and tools that are
available to the very, very rich.
So all important things to consider.
Uh, and then only when we understand this, can we actually start talking about what policies
should be?