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REGRESSIVE TAX:

A tax in which the proportion of income paid in taxes is smaller for higher income levels. A regressive income tax exists if taxpayers with more income pay a lower tax rate relative to income as income increases. A regressive tax is one of three alternations. The other two are progressive tax, in which the proportion of income paid in taxes is greater for higher income levels, and proportional tax, in which the proportion of income paid in taxes is the same for all income levels.
While taxes are levied on a variety of tax bases (sales, property, gasoline, corporate profits), tax proportionality evaluates the proportion of income paid in the tax at alternative income levels. A regressive tax exists if higher income levels pay the a greater proportion of income in tax. Meaning that lower income levels pay a smaller proportion of income in tax.

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

Regressive taxes are favored by a sizable contingent of the population, especially those with relatively more income. Vested interest of the wealthy aside, a case can be made for the use of regressive taxes. However, reasonable arguments can also be made that regressive taxes are not the best.
  • 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

Regressive tax is one of three tax proportionality alternatives. The other two are proportional tax and progressive tax.
  • 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

Taxes are never far removed from politics. Few members of society actually like paying taxes. Most do so only reluctantly knowing that government provides valuable public goods. Almost everyone, though, prefers that someone else pays the taxes.

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.

With political power ebbing and flowing between conservative and political views, so too taxes ebb and flow between regressive and progressive, seldom settling on proportional.

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Recommended Citation:

REGRESSIVE TAX, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: June 24, 2024].


Check Out These Related Terms...

     | tax proportionality | proportional tax | progressive tax | taxation principles | taxation basics | tax effects | revenue effect | allocation effect | tax equity | ability-to-pay principle | benefit principle | horizontal equity | vertical equity | tax efficiency | tax incidence | tax wedge | deadweight loss |


Or For A Little Background...

     | taxes | government functions | equity | distribution standards | public finance | public goods | political views |


And For Further Study...

     | political views | public choice | good types | market failures | public goods: demand | public goods: efficiency | tax multiplier | personal tax and nontax payments | transfer payments |


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