Regressive tax

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Graph demonstrates a progressive tax distribution on income that becomes regressive for top earners.[1]

A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.[2][3][4][5][6] "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.[7][8] 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. These 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 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.[9] To measure the effect, the income elasticity of the good being taxed as well as the income substitution effect 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 increases.[10][11][12][13] In between is a flat or proportional tax, where the tax rate is fixed as the amount subject to taxation increases.

Undisputed examples[edit]

  • A tax with a cap, above which no taxes are paid.
  • The so-called sin taxes are also criticized for being regressive, as it is assumed 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."[9] Tobacco in particular is highly regressive, with the bottom quintile of income paying an effective rate 583% higher than that of the top quintile.[9]
  • An allowance reduction[14] in an income tax system allows for an individual's personal allowance to be withdrawn, making a higher marginal tax for a limited band before returning to the underlying rate. In the UK there is an effective 60% band at £100,000 that returns to 40% at £113,000.[15]

Disputed examples[edit]

  • Taxation based on everyday essentials like food (e.g. sales tax, salt tax), clothing (value added tax), transport (fuel tax), energy (carbon tax) and housing (council tax, window tax) are frequently regressive. The income elasticity of demand of food for example is usually less than 1 (inelastic) (see Engel's law) and therefore as a household's income rises, even significantly, the tax collected remains almost the same. So as a proportion of available expenditure the tax burden falls far more heavily on households with lower incomes.
  • Certain payroll taxes, such as Social Security in the United States, are considered regressive in that there is a cap so that higher income earners pay a lower proportion of their overall income than lower earning people. [16]However, for people with lower than average earnings, the ratio of the lifetime benefits they receive from Social Security to the lifetime payroll taxes they pay for the program is higher than it is for people with higher average earnings. In that sense, the Social Security system is progressive. For people in the bottom fifth of the earnings distribution, the ratio of benefits to taxes is almost three times as high as it is for those in the top fifth.[17]

See also[edit]

Notes[edit]

  1. ^ "Who Pays Taxes in America?". Citizens for Tax Justice. 12 April 2012. 
  2. ^ Webster (3): decreasing in rate as the base increases (a regressive tax)
  3. ^ American Heritage (3). Decreasing proportionately as the amount taxed increases: a regressive tax.
  4. ^ Dictionary.com (3).(of tax) decreasing proportionately with an increase in the tax base.
  5. ^ Britannica Concise Encyclopedia: Tax levied at a rate that decreases as its base increases.
  6. ^ Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), Concepts of Taxation, Dryden Press: Fort Worth, TX
  7. ^ Hyman, David M. (1990) Public Finance: A Contemporary Application of Theory to Policy, 3rd, Dryden Press: Chicago, IL
  8. ^ James, Simon (1998) A Dictionary of Taxation, Edgar Elgar Publishing Limited: Northampton, MA
  9. ^ a b c Barro, Josh (March 25, 2010). "Alcohol Taxes are Strongly Regressive". National Review Online. 
  10. ^ Webster (4b): increasing in rate as the base increases (a progressive tax)
  11. ^ American Heritage (6). Increasing in rate as the taxable amount increases.
  12. ^ Britannica Concise Encyclopedia: Tax levied at a rate that increases as the quantity subject to taxation increases.
  13. ^ Princeton University WordNet: (n) progressive tax (any tax with a rate that increases as the amount subject to taxation increases)
  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. ^ Social Security Snares & Delusions by Irwin Stelzer, The Weekly Standard. Retrieved July 23, 2008
  17. ^ "Is Social Security Progressive?". The US Congressional Budget Office (CBO). 2006-12-15. Retrieved 2014-02-08. 

External links[edit]