Regressive Tax Definition

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Regressive Tax Definition

What Is a Regressive Tax?

A regressive tax is one that is administered consistently, with a higher proportion of revenue taken from low-income earners than from high-income earners. It is opposed to a progressive tax, which takes a bigger proportion of high-income taxpayers’ earnings.

Key Takeaways

  • A regressive tax is one that is levied regardless of income, with low- and high-income taxpayers paying the same amount.
  • This kind of tax burdens low-income taxpayers more than high-income earners since the same dollar amount amounts to a considerably higher proportion of total income generated.
  • A regressive system varies from a progressive system in that higher income earners pay a larger proportion of their income tax than lower income earners.
  • Income is taxed progressively in the United States and several other industrialized countries, while other taxes, such as sales tax and user fees, are collected evenly.

Understanding Regressive Taxes

Because it is applied consistently to all scenarios, regardless of the taxpayer, a regressive tax impacts individuals with lower incomes more severely than persons with higher incomes. While taxing everyone at the same rate may be reasonable in certain contexts, it is considered unfair in others. As a result, most income tax systems use a progressive schedule in which high-income earners are taxed at a greater percentage rate than low-income earners, while other forms of taxes are imposed evenly.

Although the United States has a progressive taxation system in terms of income tax, which means that higher income earners pay a larger proportion of taxes each year than those with lower incomes, we do pay some levies that are termed regressive taxes. State sales taxes, user fees, and, to a lesser extent, property taxes are examples of these.

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A regressive tax system is more frequent in developing nations, since there are more individuals in the same income group, lessening the negative effect of the regressive tax.

Sales Taxes

Governments impose uniform sales tax to all customers regardless of what they purchase. Even if the tax is uniform (such as a 7% sales tax), lower-income customers are disproportionately impacted.

For example, suppose two people each spend $100 per week on apparel and pay $7 in tax on their retail purchases. The first person makes $2,000 per week, thus the sales tax rate on her purchase is 0.35 percent of her income. In comparison, the second person makes $320 per week, therefore her apparel sales tax is 2.2 percent of her income. Although the tax rate is the same in both circumstances, the individual with the lower income pays a greater proportion of his or her income, making the tax regressive.

User Fees

Government-imposed user fees are another kind of regressive tax. Admission to government-funded museums and state parks, fees for driver’s licenses and identity cards, and tolls for highways and bridges are all examples of these levies.

For example, if two families visit the Grand Canyon National Park and pay a $30 entry charge, the better-income family pays a smaller proportion of their income to enter the park, while the lower-income family pays a greater percentage. Although the cost is the same, it places a greater burden on the lower-income household, making it a regressive tax once again.

Property Taxes

Property taxes are inherently regressive because, regardless of income, two persons in the same tax jurisdiction pay the same amount of property tax if they reside in homes with the same values. However, since they are based on the value of the property, they are not totally regressive in reality. Lower-income people are assumed to reside in less costly dwellings, largely indexing property taxes to income.

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Flat Taxes

The term “flat tax,” which is often used in income tax disputes, refers to a taxation system in which the government taxes all income at the same proportion regardless of wages. There are no particular deductions or credits under a flat tax. Instead, each individual pays a fixed proportion of their total income, making it a regressive tax. As a consequence, lower-income persons essentially pay the same rate as higher-income earners rather than lower-income earners.

“Sin” Taxes

Sin taxes are charged on things that are perceived to be damaging to society. These are added on the cost of commodities such as alcohol and cigarettes to discourage people from using them. The Internal Revenue Service (IRS) deems these taxes regressive since, once again, they punish low-income taxpayers more than high-income ones.

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