Suppose, for example, that someone like Winston Smythe Kennsington III earns $10 million of income and pays $1 million in income taxes (10 percent) and that Pollyanna Pumpernickel earns $10,000 in taxes and pays $2,000 in income taxes (20 percent). Because Winston pays a smaller proportion of income in taxes than Pollyanna, the income tax is regressive.

The same notion applies to other types of taxes. If Winston pays $100,000 in state and local sales taxes over the course of year on his myriad of luxury consumption purchases (1 percent of his $10 million income) and Pollyanna pays $200 in state and local sales taxes for a year of her own consumption (2 percent of her $10,000 income), then state and local sales taxes are also regressive.

Regressive tax is one of three tax proportionality alternatives. Something of a polar opposite, progressive tax is then one in which a larger proportion of income is paid in tax for higher income levels. In this case, the tax rate effectively increases with income. A proportional tax is then one in which a the same proportion of income is paid in tax for regardless of income levels. That is, the tax rate effectively remains constant with respect to income.

The Pros and Cons of Regressive

• Poor Pay More: One consideration, from a benefit principle view, is that the poor tend to benefit more from government operations and public goods (public transportation, public assistance programs, etc.) and as such should pay accordingly. Moreover, from an investment and economic growth perspective, those with more income are also more likely to invest in capital goods, which stimulates economic growth and hence benefits all members of society. If they pay a lower tax rate, making the poor pay relatively higher rates, then the wealthy have more income to invest.


• Poor Pay Less: Another consideration, from an ability-to-pay perspective, is that people actually have a less ability to pay with less income. This occurs because a larger proportion of income is spent on necessities, such as food, housing, and energy, for those with less income. The poor thus have less discretionary income and can ill afford to finance government operations. Theoretically, it can be said that marginal utility of income increases at lower income levels, meaning that $1 to a poor person is more valuable than $1 to a wealthy person. The poor, as such, suffer more when bearing a disproportionally greater tax burden.

Proportional and Progressive

• Proportional: A proportional tax is one in which the proportion of income paid in taxes is the same for all income levels. A proportional income tax exists, for example, if ever taxpayer pays exactly the same proportion of their income in taxes, that is, the same tax rate. Suppose that Winston Smythe Kennsington III earns $10 million of income and pays $1 million in income taxes (10 percent) and that Pollyanna Pumpernickel earns $10,000 in taxes and pays $1,000 in income taxes (also 10 percent). Because Winston and Pollyanna both pay 10 percent of their incomes in taxes, the income tax is proportional.


• Progressive: A progressive tax is one in which the proportion of income paid in taxes is greater for higher income levels. A progressive income tax exists, for example, if taxpayers with more income pay a larger proportion in taxes, that is, a higher tax rate. Suppose that Winston Smythe Kennsington III earns $10 million of income and pays $2 million in income taxes (20 percent) and that Pollyanna Pumpernickel earns $10,000 in taxes and pays $1,000 in income taxes (10 percent). Because Winston pays a greater proportion of income in taxes than Pollyanna, the income tax is progressive.

The Politics of Proportionality

As such, while the use of proportional taxes would seem to be a fair and reasonable approach to generating the funds needed for government operations, most taxes end up being either regressive or progressive. Those on the upper end of the income spectrum tend to prefer regressive taxes and those on the lower end tend to prefer progressive taxes.

To the extent that people with conservative political leanings also occupy the upper end of the spectrum, they also tend to favor more regressive taxes, while opposing more progressive taxes. To the extent that people with liberal political leanings also occupy the lower end of the spectrum, they also tend to favor more progressive taxes, while opposing more regressive taxes.