Regressive tax

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, where the average tax rate exceeds the marginal tax rate.^[6][7] In terms of individual income and wealth, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer's ability to pay as measured by assets, consumption, or income.

It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Regressive taxes tend to reduce the tax incidence of people with higher ability-to-pay, as they shift the incidence disproportionately to those with lower ability-to-pay. The opposite of a regressive tax is a progressive tax, where the average tax rate increases as the amount subject to taxation increases.^{[8][9][10][11]} In between is a flat or proportional tax, where the tax rate is fixed as the amount subject to taxation increases.

The term is frequently applied in reference to fixed taxes, where every person has to pay the same amount of money. The regressivity of a particular tax often depends on the propensity of the tax payers to engage in the taxed activity relative to their income. 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, then the tax may be considered regressive. To determine whether a tax is regressive, the income-elasticity of the good being taxed as well as the income-substitution effect must be considered.

Common examples

• A tax with a cap, above which no taxes are paid. The United States payroll tax is an example of this.
• A value-added tax or other sales tax on food and other essentials such as clothing, transport, and residential rents can be regressive. Since the income elasticity of demand of food is usually less than 1 (Inelastic) (see Engel's law), it tends to take up a higher percentage of the budget of a person or family with a lower income.
• A poll tax (a discriminatory tax that was a pre-condition of the exercise of the ability to vote) is a fixed tax for each person. Since each person pays the same amount of money, it is a lower proportion for people with higher incomes.
• Television licences that are implemented in many countries, especially in Europe, are considered regressive taxes and in most cases consist of a flat annual payment for the use of a television.
• The so called sin taxes are also criticized for being regressive, assuming that they are often consumed more (or at least at a greater proportion) by the lower classes. For example, "people in the bottom income quintile spend a 78% larger share of their income on alcohol taxes than people in the top quintile."^[12] Tobacco in particular is highly regressive, with the bottom quintile of income paying an effective rate 583% higher than that of the top quintile.^[12]

United States

According to Congressional Budget Office estimates,^[13] the federal tax system is a progressive tax system for earners all but the richest 1% of Americans. According to the study, the lowest earning 20% of Americans (24.1 million households earning an average of $15,900 in 2005) paid an effective federal tax rate of 3.9%, when taking into account income tax, social insurance tax, and excise tax. The highest earning 5% (5.8 million households earning an average of $520,200 in 2005) paid an effective federal tax rate of 21.5%. However, the highest earning 1% of Americans (1.1 million households earning an average of $1,558,500 in 2005) paid an "effective" federal tax rate of 21.3%.

Investor and multi-billionaire Warren Buffett has criticized the U.S. tax code as highly regressive, citing himself as anecdotal evidence: Buffett stated that with an income of over $46 million, he pays a tax rate of 17.7 percent, whereas his receptionist pays a tax rate of 30 percent.^[14]

Buffett's critique focuses on significantly lower tax rates applied to certain forms of investment income including capital gains. However, progressive or regressive taxation often must be considered as part of an overall system since tax codes have many interdependent variables.

See also

• Lump-sum tax
• Progressive tax
• Proportional tax
• Tax incidence
• Laffer curve
• Suits index
• Ghetto Tax

Notes

External links

• Historic Struggles - A chapter from the 2004 book, Greed and Good ISBN 1-891843-25-7, that traces the history of efforts to create and maintain a progressive tax structure in the United States.