A
regressive tax is a
taxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law.Taxes are also imposed by many subnational entities...
imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. In simple terms, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer's ability to pay as measured by assets, consumption, or income. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the marginal tax rate.
A
regressive tax is a
taxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law.Taxes are also imposed by many subnational entities...
imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. In simple terms, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer's ability to pay as measured by assets, consumption, or income. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the marginal tax rate. It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Regressive taxes attempt to reduce the
tax incidenceIn economics, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to "fall" upon the group that, at the end of the day, bears the burden of the tax...
of people with higher ability-to-pay, as they shift the incidence disproportionately to those with lower ability-to-pay. The opposite of a regressive tax is a
progressive taxA progressive tax is a tax by which the tax rate increases as the taxable amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate. It can be...
, where the tax rate increases as the amount subject to taxation increases. In between is a flat or
proportional taxA proportional tax is a tax imposed so that the tax rate is fixed as the amount subject to taxation increases. In simple terms, it imposes an equal burden on the rich and poor...
, where the tax rate is fixed as the amount subject to taxation increases.
The term is frequently applied in reference to fixed taxes, where every person has to pay the same amount of money. The regressivity of a particular tax often depends on the propensity of the tax payers to engage in the taxed activity relative to their income. In other words, if the activity being taxed is more likely to be carried out by the poor and less likely to be carried out by the rich, then the tax may be considered regressive. To determine whether a tax is regressive, the income-elasticity of the good being taxed as well as the income-substitution effect must be considered.
Examples
A value-added tax or other
sales taxA sales tax is a consumption tax charged at the point of purchase for certain goods and services. The tax is usually set as a percentage by the government charging the tax. There is usually a list of exemptions...
on food and other essentials such as clothing, transport, and residential rents can be regressive. Since the income elasticity of demand of food is usually less than 1 (
see Engel's lawEngel's law is an observation in economics stating that, with a given set of tastes and preferences, as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises...
), it tends to take up a higher percentage of the budget of a person or family with a lower income. A
poll taxA poll tax, head tax, or capitation tax is a tax of a portioned, fixed amount per individual in accordance with the census . When a corvée is commuted for cash payment, in effect it becomes a poll tax...
is a fixed tax for each person: since each person pays the same amount of money, it is a lower proportion for people with higher incomes.
Television licenceA television licence is an official licence required in many countries for the reception of television broadcasts...
s that are implemented in many countries, especially in Europe, are considered regressive taxes and in most cases consist of a flat annual payment for the use of a television. So called
sin taxA sin tax is a kind of sumptuary tax: a tax specifically levied on certain generally socially proscribed goods, usually alcohol and tobacco.-Summary:...
es are also criticized for being regressive, since the products taxed (usually
alcoholIn chemistry, an alcohol is any organic compound in which a hydroxyl group is bound to a carbon atom of an alkyl or substituted alkyl group. An important group of acohols is formed by the simple acyclic alcohols, the general formula for which is C
nH
2n+1OH...
and
tobaccoTobacco is an agricultural product processed from the leaves of plants in the genus Nicotiana. It can be consumed, used as an organic pesticide, and in the form of nicotine tartrate it is used in some medicines. In consumption it most commonly appears in the forms of smoking, chewing, snuffing, or...
) are often consumed more (or at least at a greater proportion) by the lower classes.
The New York Times in June 2005 ran a high-profile campaign arguing that at the very-high incomes United States tax-payers actually face regressive taxation rates, equating income tax across wage and rental incomes. For instance, they project that if the
BushGeorge Walker Bush was the 43rd President of the United States from 2001 to 2009 and the 46th Governor of Texas from 1995 to 2000....
tax cutA tax cut is a reduction in taxes. Economic stimulus via tax cuts, along with interest rate intervention and deficit spending, are one of the central tenets of Keynesian economics.-Economic theory:...
s are made permanent: “By 2015, those making between $80,000 and $400,000 will pay as much as 13.9 percentage points more of their income in federal taxes than those making more than $400,000.” Investor and multi-billionaire
Warren BuffettWarren Edward Buffett is a U.S. investor, businessman, and philanthropist. He is one of the most successful investors in history, the primary shareholder and CEO of Berkshire Hathaway, and in 2008 was ranked by Forbes as the richest person in the world with an estimated net worth of approximately...
has criticized the U.S. tax code as highly regressive, citing himself as an example: with an income of over $46 million, Buffet pays a tax rate of 17.7 percent, whereas his
receptionistA receptionist is a person in an office/administrative support position. The work is usually performed in a waiting area such as a lobby or front office desk of an organization or business...
pays a tax rate of 30 percent.
See also
- Lump-sum tax
A lump-sum tax is a tax that is a fixed amount no matter what the change in circumstance of the taxed entity. It is a regressive tax, such that the lower income is, the higher percentage of income applicable to the tax...
- Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate. It can be...
- Proportional tax
A proportional tax is a tax imposed so that the tax rate is fixed as the amount subject to taxation increases. In simple terms, it imposes an equal burden on the rich and poor...
- Tax incidence
In economics, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to "fall" upon the group that, at the end of the day, bears the burden of the tax...
- Laffer curve
The Laffer curve is an economic concept used to illustrate the theory that increases in the rate of taxation do not necessarily increase tax revenue. The basic assumption is that both a 0% income tax rate and a 100% tax rate will generate no revenue. An optimal tax rate is therefore assumed to lie...
- Suits index
The Suits index of a public policy is a measure of collective progressivity, named for economist Daniel B. Suits. Similar to the Gini Coefficient, the Suits index is calculated by comparing the area under the Lorenz curve to the area under a proportional line...
External links
- Historic Struggles - A chapter from the 2004 book, Greed and Good ISBN 1-891843-25-7, that traces the history of efforts to create and maintain a progressive tax structure in the United States.