Regressive Taxes: Definition, Examples & Impact on Income Inequality

A regressive tax is a tax applied in a way that the tax rate decreases with the increase of the taxpayer’s incomeRemunerationRemuneration is any type of compensation or payment that an individual or employee receives as payment for their services or the work that they do for an organization or company. It includes whatever base salary an employee receives, along with other types of payment that accrue during the course of their work, which. This type of tax places more burden on low-income demographics rather than the high-income population. The imposed burden is determined by the percentage of the tax amount relative to income.

Generally, a regressive tax is a tax that is an absolute currency amount levied uniformly to all of the population. Therefore, the low-income population carries a bigger burden than those with high income because the tax amount takes a greater percentage of their income, although the tax dollar amount is the same.

A regressive tax system is not commonly used for income taxation. However, it is used with many other taxes, such as sales or sin tax. The regressive tax is directly opposite to progressive taxProgressive TaxA progressive tax is a tax rate that increases as the taxable value goes up. It is usually segmented into tax brackets that progress to.

Types of Regressive Tax

Regressive taxation can be encountered in different taxes with a uniform tax amount. Nevertheless, the degree of regression varies.

1. Sales tax

Sales taxes are imposed on major goods available to consumers. Since sales taxes are applied uniformly and affect all demographic groups within a population, they are considered regressive.

2. Sin tax

Sin taxes are levied on the goods that are considered harmful to society. The goods include tobacco, alcohol, and products with excessive sugar. Sin taxes are highly regressive because of the consumption differences between the low- and high-income parts of the population. Many studies show that people who earn less tend to consume more harmful products such as tobacco or alcohol relative to individuals who earn more.

3. Property tax

Property taxes are regressive in theory. They are based on the property’s valueReal EstateReal estate is real property that consists of land and improvements, which include buildings, fixtures, roads, structures, and utility systems. Property rights give a title of ownership to the land, improvements, and natural resources such as minerals, plants, animals, water, etc. and not on the owner’s income. Thus, if a person with a low income and a person with a high income own properties with the same value, they will pay the same tax amount.

Therefore, property tax is considered regressive. However, in reality, wealthier people tend to purchase properties of higher value than poor people. Therefore, property tax is – effectively – the least regressive in our list.

Tax Example

Last weekend, John and Sam went shopping. They both bought new clothing, and each spent $300. The sales tax rate is 13%. Therefore, each of them paid $39 in taxes. However, John’s salary is $3,000 per month, while Sam makes $4,000 monthly.

While both John and Sam paid the same amount of tax, the proportion of the tax amount to income for Sam was only $39/$4,000=0.975%, while John’s rate was $39/$3,000=1.30%. Thus, the sales tax is regressive.

Additional Resources

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• Tax ShieldTax ShieldA Tax Shield is an allowable deduction from taxable income that results in a reduction of taxes owed. The value of these shields depends on the effective tax rate for the corporation or individual. Common expenses that are deductible include depreciation, amortization, mortgage payments and interest expense