Regressive Tax Definition
A regressive tax system is a type of taxation that takes a larger percentage of income from low-income earners than from high-income earners. It is the opposite of a progressive tax system, which takes a larger percentage of income from high-income earners than from low-income earners.
There are several types of regressive taxes, including sales taxes, payroll taxes and property taxes.
Types of Regressive Taxes
Sales tax is a regressive tax because people who have less money can afford to buy fewer items on which the tax is imposed — called “taxing away the bottom.” The same holds true with a value-added tax. Sales taxes, however, are only imposed in a minority of the states and localities, and consumers usually pay most or all of that tax when they buy goods.
Property taxes and payroll taxes (which are deducted from income) are regressive because these kinds of taxation do not take into account how income earners manage their money. While sales tax is paid for by both rich and poor people, it is more of a burden to the poor because a greater percentage of their income goes towards buying necessities, which are taxed at a higher rate.
Advantages and Disadvantages of Regressive Tax Systems
There are several advantages and disadvantages of regressive tax systems:
- Regressive taxes are easier to administer and calculate than progressive taxes.
- Regressive taxes may be more politically popular because they are seen as “fair.”
- Regressive taxes may be less likely to cause economic distortions than progressive taxes.
- Regressive taxes can lead to increased income inequality.
- Regressive taxes can place a greater financial burden on low-income earners.
- Regressive taxes may cause people to spend less money, which can lead to decreased economic activity.
Regressive Tax vs. Progressive Tax
A regressive tax takes a larger percentage of income from low-income earners than it does from high-income earners. A progressive tax system has the opposite effect, taking a larger percentage of income from high-income earners than it does from low-income earners.
The opposite of a regressive tax is called a “progressive tax.” A progressive tax system takes a larger percentage of income from high-income earners than it does from lower-income earners.
A flat or proportional tax rate is considered neutral since everyone pays the same rate. This restricts the amount of revenue that the government can collect, which is one reason why most countries have a progressive tax system. The more money a person makes, the higher percentage of income he pays.
The Bottom Line
There are many different types of taxes, from regressive to progressive. A person must consider how a certain type of tax affects the economy and the country before deciding how it should be implemented or used.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.