Regressive tax
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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] In simpler terms, 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. "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] It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Regressive taxes attempt 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 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 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 (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 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. So called sin taxes are also criticized for being regressive, since the products taxed (usually alcohol and tobacco) are often consumed more (or at least at a greater proportion) by the lower classes.
United States
The New York Times in June 2005 ran a high-profile campaign arguing that at the very-high incomes United States tax-payers actually face regressive taxation rates, equating income tax across wage and rental incomes. For instance, they project that if the Bush tax cuts are made permanent: “By 2015, those making between $80,000 and $400,000 will pay as much as 13.9 percentage points more of their income in federal taxes than those making more than $400,000.”[12] Investor and multi-billionaire Warren Buffett has criticized the U.S. tax code as highly regressive, citing himself as an example: with an income of over $46 million, Buffet pays a tax rate of 17.7 percent, whereas his receptionist pays a tax rate of 30 percent.[13]
In addition, the FICA tax is regressive, since the Social Security portion of it is a flat 12.4% (combined) up to the wage cap ($106,800), and every dollar above that cap is untaxed.[14] The Medicare portion of this tax, however, is flat at all income levels.
Corporations incorporated in Delaware, pay a regressive state income tax.
See also
- Lump-sum tax
- Conservatism in the United States
- Progressive tax
- Proportional tax
- Tax incidence
- Laffer curve
- Suits index
Notes
- ^ Webster (3): decreasing in rate as the base increases (a regressive tax)
- ^ American Heritage (3). Decreasing proportionately as the amount taxed increases: a regressive tax.
- ^ Dictionary.com (3).(of tax) decreasing proportionately with an increase in the tax base.
- ^ Britannica Concise Encyclopedia: Tax levied at a rate that decreases as its base increases.
- ^ Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), Concepts of Taxation, Dryden Press: Fort Worth, TX
- ^ Hyman, David M. (1990) Public Finance: A Contemporary Application of Theory to Policy, 3rd, Dryden Press: Chicago, IL
- ^ James, Simon (1998) A Dictionary of Taxation, Edgar Elgar Publishing Limited: Northampton, MA
- ^ Webster (4b): increasing in rate as the base increases (a progressive tax)
- ^ American Heritage (6). Increasing in rate as the taxable amount increases.
- ^ Britannica Concise Encyclopedia: Tax levied at a rate that increases as the quantity subject to taxation increases.
- ^ Princeton University WordNet: (n) progressive tax (any tax in which the rate increases as the amount subject to taxation increases)
- ^ Quote from the June 7, 2005 NYT editorial: “The Bush Economy” a series of articles on the subject of effectively falling tax rates for the “super-rich” were published by the Times in June 2005.
- ^ [1] Tomoeh Murakami Tse, "Buffett Slams Tax System Disparities", Washington Post, Wednesday, June 27, 2007; Page D03.
- ^ http://www.ssa.gov/OACT/COLA/cbb.html Contribution and Benefit Base, Social Security Administration
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.