Regressive Tax - Explained
What is a Regressive Tax?
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Table of ContentsWhat is a Regressive Tax?How Does a Regressive Tax Work?Sales TaxUser FeesProperty TaxesFlat TaxSin TaxesAcademic Research on Regressive Tax
What is a Regressive Tax?
A regressive tax refers to a uniform tax that takes a larger percentage of income from the people who earn less than from the ones who earn more or have a higher income. A regressive tax works in contrast to a progressive tax that focuses on the high-income category for a bigger percentage.
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How Does a Regressive Tax Work?
A regressive tax can have a severe effect on low-income earners than high-income ones. It is so because it is applicable in a uniform manner in all scenarios irrespective of the taxpayer. Though it may seem to be just in some situations to tax all people at similar rates, there can be cases where it may seem to be unfair. Generally, a progressive schedule is employed by income tax institutions that charge more tax from high-income earners rather than the ones having low income. The U.S. follows a progressive tax approach which means that people falling in high-income brackets are supposed to pay more taxes every year than the ones with a lower income level. A few levies such as sales tax, user fees, property tax, etc. fall under the regressive tax category.
Sales tax, as the name suggests, is the type of tax that customers incur at the time of buying a product. This tax is uniform in nature and because of it, individuals falling in the lower-income group get more affected. For instance, there are two persons who buy the same product worth $100 every week and pay similar sales tax of $7 on retail transactions. Now, the first person who makes $2000 every week will incur a 0.35 percent sales tax on his income. On the other side, the second person who comparatively makes a lower income of $320 per week will be paying 2.2% sales tax on his income. As we can analyze, the person having higher income pays lesser sales tax as opposed to the one with lower income, therefore leading to the regressive tax.
User fees, another type of regressive tax, is imposed by the government. It comprises registration fees for public-funded state parks, charges associated with drivers license, ID or identity cards, and toll charges for bridges and roads. For instance, if two individuals are traveling to the Grand Canyon National Park, and incur an entrance fee of $30, then the one with more income will be paying less amount of its earnings for accessing the place, and the one with lesser income will pay more. Even if the fees for both individuals is same, the burden of tax is more on the one having lower earnings, thereby resulting in a regressive tax.
Property taxes are said to be regressive in a fundamental manner as two persons living in houses of the same values will pay a similar amount of property taxes irrespective of their income levels. But, you can not call them to be totally regressive as they are dependent on the property's worth or price. Usually, people having more income levels go for expensive houses as compared to the ones who have lower incomes.
Flat tax is a taxation approach that involves same percentage of tax irrespective of income levels of people. This kind of tax doesn't involve any specific credits or deductions. Instead, every individual incurs a specific percentage on all income levels, therefore resulting in a regressive tax.
Sin taxes are imposed on products that are not safe for consumption for society. One can see such taxes levied on alcohol and tobacco so as to demotivate people from consuming them. The Internal Revenue Service calls such taxes regressive as they cause more hassle for persons with lower income than the ones with more income.
Academic Research on Regressive Tax