Regressive TaxDefined along with Examples
What is a Regressive Tax?
A Regressive Tax imposes equal tax rates regardless of the income level of a person.
Essentially, with a uniform tax rate, those who are earning less are charged more tax than those who earn more.
This is in contrast to Progressive Tax where high-income earners are taxed more.
Understanding Regressive Taxes
Regressive Taxes are not commonly used to tax income in the United States because a Progressive Tax System is followed.
If a Regressive Tax was applied to all income levels, that would have greatly affected those who are earning less.
While the practice can be seen as fair, it will be an added burden for low-income earners.
With a Progressive Tax applied in the United States for income tax, there are some areas where a regressive tax is imposed such as Sales Taxes, Property Taxes, Sin Tax, and User Fees, just to name a few.
Sales Taxes
The sale of certain goods and services is taxed uniformly regardless of how much a person earns.
In the US, the sales tax varies depending on the State.
If a State uses a Sales Tax of 4.5%, this rate will be the same even if a person earns $3,000 a month or $15,000 a month.
For example, 2 persons make the same purchase of shoes for $225.
For a person who owns $3,000 a month, this is 7.5% of his or her income.
For the person who earns $15,000 a month, the shoe purchase is only 1.5% of the total salary.
The tax, in this case, is regressive because the same rate is applied for both persons.
User Fees
When people pay fees to access facilities or public services, the same fee is charged regardless of the income background of a person.
If a family wishes to visit a museum that charges $15 per person, the same fee is applied to all.
For families that belong to the high-income bracket, the $15 is almost nothing.
But for a family of 5 that earns $2,000 a month, that fee cuts a lot from their monthly budget.
Property Taxes
In theory, Property Taxes are regressive taxes because property owners living in the same neighborhood pay the same property tax rate.
And although property taxes are regressive in nature, essentially, the taxes paid are based on the amount of the property.
Where the difference lies is in the value of the property that low-income earners and high-income earners can afford.
Those who earn more will be more inclined to buy more expensive properties and thus, pay more on property taxes.
Flat Taxes
An alternative to income taxes is a flat tax. This is done by applying a flat tax rate to all income levels.
It becomes a regressive tax because those who earn less are burdened by the bigger tax deduction from their salaries.
“Sin Taxes”
Products like alcohol and tobacco are considered harmful to society.
This is why they are called “Sin” taxes.
The high taxes imposed on these products is to dissuade people from buying them.
The impact of the taxes hurt those who earn less as compared to those who earn more.
For this, the IRS considers Sin Taxes as regressive.
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University of Texas Austin "Progressive and regressive tax systems" Page 1 . April 5, 2022
Northeastern University School of Business "What’s in a Name? Progressive vs. Regressive Taxation" Page 1 . April 5, 2022