Regressive tax
Encyclopedia
A regressive tax is a tax
imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "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. 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. 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.
estimates, 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.
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.
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "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. 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
Tax incidence
In economics, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to "fall" upon the group that, at the end of the day, bears the burden of the tax...
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
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
, where the average tax rate increases as the amount subject to taxation increases. In between is a flat or proportional tax
Proportional tax
A proportional tax is a tax imposed so that the tax rate is fixed. The amount of the tax is in proportion to the amount subject to taxation. "Proportional" describes a distribution effect on income or expenditure, referring to the way the rate remains consistent , where the marginal tax rate is...
, 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 taxPayroll taxPayroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax , or pay-as-you-go tax...
is an example of this. - A value-added tax or other sales taxSales taxA sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....
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 lawEngel's lawEngel's law is an observation in economics stating that as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises...
), it tends to take up a higher percentage of the budget of a person or family with a lower income. - A poll taxPoll taxA poll tax is a tax of a portioned, fixed amount per individual in accordance with the census . When a corvée is commuted for cash payment, in effect it becomes 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 licenceTelevision licenceA television licence is an official licence required in many countries for the reception of television broadcasts...
s 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 taxSin taxA sin tax is a kind of sumptuary tax: a tax specifically levied on certain generally socially proscribed goods and services. These goods are usually alcohol and tobacco, but also include candies, soft drinks, fat foods and coffee, while services range from prostitution to...
es 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 quintileQuintileQuintile may refer to:*Income quintiles, a division of households by income into five quantiles*Quintiles, a biotechnology research company based in the United States...
spend a 78% larger share of their income on alcohol taxes than people in the top quintile." Tobacco in particular is highly regressive, with the bottom quintile of income paying an effective rate 583% higher than that of the top quintile.
United States
According to Congressional Budget OfficeCongressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....
estimates, the federal tax system is a progressive tax
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
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
Warren Buffett
Warren Edward Buffett is an American business magnate, investor, and philanthropist. He is widely regarded as one of the most successful investors in the world. Often introduced as "legendary investor, Warren Buffett", he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is...
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
Receptionist
A receptionist is an employee taking an office/administrative support position. The work is usually performed in a waiting area such as a lobby or front office desk of an organization or business...
pays a tax rate of 30 percent.
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 taxLump-sum taxA lump-sum tax is a tax that is a fixed amount, no matter the change in circumstance of the taxed entity....
- Progressive taxProgressive taxA progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
- Proportional taxProportional taxA proportional tax is a tax imposed so that the tax rate is fixed. The amount of the tax is in proportion to the amount subject to taxation. "Proportional" describes a distribution effect on income or expenditure, referring to the way the rate remains consistent , where the marginal tax rate is...
- Tax incidenceTax incidenceIn economics, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to "fall" upon the group that, at the end of the day, bears the burden of the tax...
- Laffer curveLaffer curveIn economics, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity . The curve is constructed by thought experiment...
- Suits indexSuits indexThe Suits index of a public policy is a measure of collective progressivity, named for economist Daniel B. Suits. Similar to the Gini coefficient, the Suits index is calculated by comparing the area under the Lorenz curve to the area under a proportional line...
- Ghetto TaxGhetto TaxThe term ghetto tax is used to describe the generally higher prices those with low incomes pay for goods and services, particularly those living in poverty-stricken areas.-Economic principles:...
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.