A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.[1][2][3][4][5] "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, so that the average tax rate exceeds the marginal tax rate.[6][7]

The regressivity of a particular tax can also factor the propensity of the taxpayers to engage in the taxed activity relative to their resources (the demographics of the tax base). In other words, if the activity being taxed is more likely to be carried out by the poor and less likely to be carried out by the rich, the tax may be considered regressive.[8] To measure the effect, the income elasticity of the good being taxed as well as the income effect on consumption must be considered. The measure can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime.

The opposite of a regressive tax is a progressive tax, in which the average tax rate increases as the amount subject to taxation rises.[9][10][11][12] In between is a flat or proportional tax, where the tax rate is fixed as the amount subject to taxation increases.

Examples

Implementations

In 2005, the Swiss canton of Obwalden implemented a regressive taxation system. It was struck down by the Federal Supreme Court of Switzerland in 2007, because it ran counter to the Swiss Federal Constitution.[18]

Regressive taxes are implemented in the United States primarily through sales taxes, excise taxes, and payroll taxes.[19] Sales taxes are imposed by state and local governments on goods and services, impacting lower-income individuals more as they spend a larger portion of their income on necessities subject to these taxes. Excise taxes, such as those on gasoline, tobacco, and alcohol, also tend to affect lower-income households disproportionately because they consume a higher percentage of their income on these taxed items. Additionally, the Social Security payroll tax is regressive up to a certain income threshold, as it applies to all workers but only taxes a portion of their earnings, exempting higher-income earners beyond that threshold. These regressive tax mechanisms result in lower-income individuals paying a larger share of their income in taxes compared to higher-income individuals, contributing to income inequality concerns in the U.S.

See also

Notes

  1. ^ Webster (3): decreasing in rate as the base increases (a regressive tax)
  2. ^ American Heritage Archived 2008-06-03 at the Wayback Machine (3). Decreasing proportionately as the amount taxed increases: a regressive tax.
  3. ^ Dictionary.com (3).(of tax) decreasing proportionately with an increase in the tax base.
  4. ^ Britannica Concise Encyclopedia: Tax levied at a rate that decreases as its base increases.
  5. ^ Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), Concepts of Taxation, Dryden Press: Fort Worth, TX
  6. ^ Hyman, David M. (1990) Public Finance: A Contemporary Application of Theory to Policy, 3rd, Dryden Press: Chicago, IL
  7. ^ James, Simon (1998) A Dictionary of Taxation, Edgar Elgar Publishing Limited: Northampton, MA
  8. ^ a b c Barro, Josh (March 25, 2010). "Alcohol Taxes are Strongly Regressive". National Review Online.
  9. ^ Webster (4b): increasing in rate as the base increases (a progressive tax)
  10. ^ American Heritage Archived 2009-02-09 at the Wayback Machine (6). Increasing in rate as the taxable amount increases.
  11. ^ Britannica Concise Encyclopedia: Tax levied at a rate that increases as the quantity subject to taxation increases.
  12. ^ Princeton University WordNet[permanent dead link]: (n) progressive tax (any tax with a rate that increases as the amount subject to taxation increases)
  13. ^ "Contribution and Benefit Base". ssa.gov. Retrieved 2022-08-22.
  14. ^ "HM Revenue & Customs: Income Tax allowances". Hmrc.gov.uk. Retrieved 2014-01-16.
  15. ^ Tony Wickenden (November 13, 2009). "The 60% tax trap". Money Marketing.
  16. ^ Morgan, Kimberly J.; Prasad, Monica (2009). "The Origins of Tax Systems: A French‐American Comparison". American Journal of Sociology. 114 (5): 1350–1394. doi:10.1086/595948. ISSN 0002-9602. JSTOR 10.1086/595948. S2CID 21231105.
  17. ^ Wolff, Rick (2011-04-01). "Lotteries as Disguised, Regressive, and Counterproductive Taxes". International Journal of Mental Health and Addiction. 9 (2): 136–139. doi:10.1007/s11469-010-9269-2. ISSN 1557-1882. S2CID 44358165.
  18. ^ "Swiss high court strikes down state tax favoring rich". The New York Times. 2007-06-01. ISSN 0362-4331. Retrieved 2022-08-11.
  19. ^ "What Is a Regressive Tax?". Tax Foundation. 2023-05-09. Retrieved 2023-09-15.