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What is a Regressive Tax?

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  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 09 October 2014
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A regressive tax can be defined as a tax that tends to increase the total percentage of income paid on those who must pay the tax. In contrast, those who have a higher income pay less of their total income on items taxed. A tax can also be considered regressive when poorer folks must purchase more of the items taxed than do richer folks.

An example of regressive tax can occur when people who are poorer live, as they tend to do in poorly insulated homes. Due to poor insulation, they may pay more money to heat or cool their homes, and pay a higher tax on the purchase of electricity and gas. Similarly a person with an old car that is a gas-guzzler may have to consume more gas and thus pay a higher proportion of their income on gas taxes, than does a person who is able to afford to purchase an energy efficient car or a hybrid vehicle.

The wealthier person gets something of a tax advantage in these situations, making taxes on energy or fuel regressive in nature. The wealthier person may live in a better insulated home, be able to increase energy efficiency by investing in double-paned windows or newer appliances, and can purchase a hybrid or at least newer vehicle. Thus their energy bills may be less, and the taxes are less.

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In simpler terms, the person who makes $30,000 US Dollars (USD) per year and drives an old car might need to purchase more gas. Say they need 20 gallons of gas per week, and the tax is $1.00 USD per gallon. In a years time the person pays slightly over $1000 USD on gas taxes alone, about 3% of total income.

Let’s say a similar person who makes $60,000 USD has a fuel-efficient car. He purchases 10 gallons of gas a week and pays just over $500 USD a year in total gas taxes. The percentage of income spent on gas tax each year is less than 1%, approximately 0.83%. You can see how this system is regressive tax in nature. The poorer person pays three times the amount of income as the richer person.

Even if a person with greater income chooses to purchase a car with less fuel efficiency, chances are the gas tax will still consume less of his/her income than it does for the poorer person. If in our above example, the person earning $60,000 USD per year does buy 20 gallons of gas a week, he or she is still only paying 1.6% of total income on gas taxes per year, about half of what the poorer person pays.

In order to prevent regressive tax on items purchased, many states make certain types of things non-taxable, especially food. This means the poorer person is not paying taxes when he or she is already consuming a large portion of their income on food expenses. Yet many items considered staples in a home are still taxed, like cleaners or paper products. Another way in which regressive tax can hit people hard is when it comes time to pay things like vehicle registration each year, which can really be difficult for many people to pay.

The litmus test then, for defining regressive tax is the percentage of income a person must pay on a tax. Few countries have regressive tax systems in place. However it has been noted that people who make especially high incomes may have access to certain tax shelters unavailable to those with low to moderate incomes. Even though such a system is progressive, tax loopholes can ultimately mean that those who make more pay less of their income in taxes than those who make less, resulting in regressive taxation.

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BrickBack
Post 4

Cafe41-I think that the proportional tax is fair because everyone pays the same percentage. If you make less you will pay less into the system.

If you earn more money you will pay more dollars in taxes but still payout the same percentage in taxes.

Proponents of the flat tax feel that every American should pay taxes and it is unfair that 50% of Americans do not pay any income taxes at all.

With the flat tax, everyone knows what they will be paying and it would eliminate the need for the IRS because the tax code would be simplified.

Although this is the utopian dream of libertarians across the country it is unlikely to pass because getting rid of a government bureaucracy is almost impossible and the pressures on the left will not allow this to replace the traditional tax code.

However, this type of tax would make income tax filing a dream.

cafe41
Post 3

Moldova-They say that sales tax rates are a form of regressive tax because everyone that consumes or purchases something will be faced with the tax.

This is a flat percentage that varies from state to state. This is a proportional tax that is levied on everyone. The value added tax or the VAT tax as it is otherwise known in Europe is a proportional tax that is added to all goods and services.

This is something that has been floated around by the Democrats in congress in order to fund the health care bill.

Most nations that have a form of socialized medicine also have a similar type of tax. This tax places a burden on high ticket markets like cars, and homes.

Many people would not be able to afford buying a car or a home if this type of tax were levied on the American people. I think that these are the regressive tax pros and cons.

This tax does raise revenue but at the expense of the poor. It also put certain markets out of reach for the average American.

Moldova
Post 2

GreenWeaver- I think that there are a lot of differences with the regressive tax vs. progressive tax. The regressive tax is not used in the United States because it punishes the poor.

Unlike a progressive tax, a regressive tax actually causes the poor to pay a higher percentage of their income than a wealthier person.

Many believe that the proposed flat tax that many political candidates were referring to fall into this category. A flat tax is a proportional tax that is a set percentage of a person’s income.

For example, if a flat tax were set at 15%, then all Americans would pay 15% of their salary as federal income taxes.

Critics say that this unjustly punishes the poor because 15% of a poor person’s salary that has no disposable income and is living paycheck to paycheck is significant.

For example, if a family of four earning $50,000 a year would pay about $7,500 in taxes while the same family earning $200,000 would pay $30,000. However, the family earning $200,000 is paying more dollars, but they also have more disposable income and will not be impacted as much as the lower income family.

GreenWeaver
Post 1

A progressive vs. regressive tax focuses on the level of taxation with respect to income. Progressive taxation is what we have in the Untied States and in many countries abroad.

Progressive taxation involves raising the tax rate based on one’s actually earnings. Therefore the top 1% of earners will pay the highest federal income taxes.

So many people argue that a progressive tax sounds fair, but it really is not because about 50% of the United States population pays no income tax and the top 50% of wage earners pay over 96% of all income taxes.

It is estimated that the top 10% of income earners actually pays over 70% of all income taxes. This punishes the most productive people in our society.

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