The Advantages of Regressive Taxes

regressive taxation

There are two types of tax systems that governments around the world use: progressive and regressive. Progressive tax systems place more taxes on those that earn more; regressive tax systems do just the opposite. The income tax system used in the progressive; the more income you earn, the higher your tax bracket. An example of a regressive tax system would be a sales tax. If two individuals spend the same amount on a given product, they'll both pay the same sales tax, regardless of whether one earns a million dollars a year and the other only $30,000.


Regressive taxes encourage saving and investment

When high-income earners pay less tax, they have more discretionary funds to use for investment and savings. The investments and savings that wealthy, high-income earners make in turn produce more income that is subject to income taxes. When the wealthy produce more income, the theory goes, they add jobs to the economy and GDP growth to the nation.

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Regressive taxes increase net government revenue

Arthur Laffer invented a concept called the Laffer Curve. The Laffer curve shows that at a certain point, lowering tax rates will actually increase government revenues, along with individual wealth, because people have more after-tax income to use for savings and investment. These additional investments in turn generate more taxable income and the cycle begins again - more investment, more wealth, more tax revenues - all through lower, regressive taxes.


Regressive tax rates encourage earning

One way of looking at it is that progressive tax systems punish people for making more money because the more you make, the more taxes you pay. Regressive systems, this view says, encourage people to earn more income because the more you make, the more you get to keep. This incentive will produce more investment, savings, job growth, and national GDP.


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