What are Regressive Taxes?

Published by Thomas Herold in Economics, Laws & Regulations

'Regressive Taxes' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Regressive taxes are those which exact a greater percentage in income off of the lower income wage earners than they do from the fortunate higher income earners. This stands in direct contrast to a  progressive tax that instead grabs a bigger percentage of taxes from the higher and highest income wage earners. A regressive tax is typically one which is equally applied to all residents in whatever their situation may be. It does not matter what the financial condition of the payer turns out to be.

The problem with a regressive tax is that it most harshly impacts those who can least afford to bear it, the lower income segment of society. The higher income individuals do not mind such taxes, as they can most easily afford to pay the flat rate percentages which are common in regressive taxes. It might actually be fairer for all people to pay in the identical tax rate, yet this proves to be most unjust in some scenarios. The majority of developed nations’ tax systems actually utilize a more progressive schedule which over taxes the higher income persons more than the lower wage earners.

Some other kinds of tax are more equally levied. There are many examples of real world regressive taxes. Among these are sales taxes, property taxes, and user fee taxes.

Sales taxes are nearly always equally levied on all consumers in a given economy. Their ability to pay is not a factor so much as is the amount of money which they spend on taxed items. The tax is equitable as a flat rate for all consumers, yet it remains a fact that those lower income earners are most dramatically impacted and even materially harmed by it.

Take the case of two separate individuals who both buy $200 in groceries every week. They will each pay $14 in sales tax on their grocery bills. The first person in this example makes $2,000 every week, translating to a sales tax rate for the groceries of .35 percent of all income. The other worker only brings home $320 each week. This amounts to a grocery sales tax of a whopping 2.2 percent of actual income. While the literal tax rate may be the same in the two scenarios, the individual with the significantly lesser income is paying a far greater share of his or her income on the regressive sales tax.

Property taxes are another classic example of regressive taxes in theory. Assuming two property owners reside in the same taxing jurisdiction and own similar properties with identical values, they will both pay the identical dollars in property taxes to the local taxing administration. This is the case no matter how much they make. The lower wage earner would pay a substantially greater share of his or her income on the property taxes in this case. One caveat is that different wage earners do not usually have identically valued properties. The poorer people and families typically live in cheaper homes, which help to index property taxes to relevant income. This is why property taxes are not purely regressive in practice.

User fees taxes are those which the government assesses in a regressive tax form. These might cover admissions to government-owned and -operated state parks, national parks, and museums. They might also include tolls on bridges and roads and drivers’ license and identification cards fees. As an example, when two families go to the Grand Canyon National Park, they each pay the same $30 fee for admission to the nature park. The higher income family is actually paying in a significantly lower percentage of total income than is the poorer family. The fee may be identical literally, yet it represents a substantially greater burden for the family which has the lesser income.

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The term 'Regressive Taxes' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.