Loading the player...

What is a 'Regressive Tax'

A regressive tax is a tax that takes a larger percentage of income from low-income earners than from high-income earners. It is in opposition with a progressive tax, which takes a larger percentage from high-income earners. A regressive tax is generally a tax that is applied uniformly to all situations, regardless of the payer.

BREAKING DOWN 'Regressive Tax'

A regressive tax affects people with low incomes more severely than people with high incomes. While it may be fair in some instances to tax everyone at the same rate, it is seen as unjust in other cases. As such, most income tax systems employ a progressive schedule that taxes high earners at a higher percentage rate than low earners, while other types of taxes are uniformly applied. Examples of regressive taxes include sales taxes, user fees and, arguably, property taxes.

Sales Tax

Governments apply sales taxes uniformly to all consumers based on what they buy. Even though the tax may be uniform (such as 7% sales tax), lower-income consumers are more affected by it.

For example, imagine two individuals each purchase $100 of groceries per week, and they each pay $7 in tax on their groceries. The first individual earns $2,000 per week, making the sales tax rate on her groceries 0.35% of income. In contrast, the other individual earns $320 per week, making her grocery sales tax 2.2% of income. In this case, although the tax is the same rate in both cases, the person with the lower income pays a higher percentage of income, making the tax regressive.

User Fees

User fees levied by the government are another form of regressive tax. These fees include admission to government-funded museums and state parks, costs for driver's licenses and identification cards, and toll fees for roads and bridges.

For example, if two families travel to the Grand Canyon National Park and pay a $30 admission fee, the family with the higher income pays a lower percentage of its income to access the park, while the family with the lower income pays a higher percentage. Although the fee is the same amount, it constitutes a more significant burden on the family with the lower income, again making it a regressive tax.

Property Taxes

Property taxes are fundamentally regressive because, if two individuals in the same tax jurisdiction live in properties with the same values, they pay the same amount of property tax, regardless of their incomes. However, they are not purely regressive in practice because they are based on the value of the property. Generally, it is thought that lower income earners live in less expensive homes, thus partially indexing property taxes to income.

Flat Tax

Often bandied around in debates about income tax, the phrase "flat tax" refers to a taxation system in which the government taxes all income at the same percentage regardless of earnings. Under a flat tax, there are no special deductions or credits. Rather, each person pays a set percentage on all income.

RELATED TERMS
  1. Progressive Tax

    A tax that takes a larger percentage from the income of high-income ...
  2. Flat Tax

    A system that applies the same tax rate to every taxpayer regardless ...
  3. Proportional Tax

    A tax system that requires the same percentage of income from ...
  4. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  5. Income Tax

    A tax that governments impose on financial income generated by ...
  6. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
Related Articles
  1. Taxes

    Comparing Regressive, Proportional and Progressive Taxes

    Learn about the basic differences between three common tax systems.
  2. Taxes

    What's a Regressive Tax?

    A regressive tax is a levy in a tax system where the tax rate does not change based on the level of income.
  3. Taxes

    Understanding Taxes

    Taxes are mandatory fees that individuals and corporations must pay to their governments.
  4. Taxes

    Explaining Progressive Tax

    A progressive tax is a levy in a tax system where the tax rate increases as the taxable base increases.
  5. Taxes

    What's a Marginal Tax Rate?

    The marginal tax rate is based on a progressive tax system, where tax rates for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon ...
  6. Taxes

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  7. Taxes

    Understanding Income Tax

    Income tax is a levy many governments place on revenue of entities within their jurisdiction.
  8. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  9. Taxes

    What is a Direct Tax?

    Governments and taxing entities impose direct taxes directly on individuals and businesses.
  10. Taxes

    5 Most Taxing Taxes for Americans

    There’s not much that unites Americans like their hatred of taxes. Here's a list of taxes we dislike the most.
RELATED FAQS
  1. What's the difference between regressive and progressive taxes?

    Learn what a regressive tax is in comparison to a progressive tax, and understand the specific types of taxes that are considered ... Read Answer >>
  2. What is the difference between a regressive tax versus a progressive tax?

    Determine how progressive and regressive taxes impact your personal finances, and learn more about how you pay both types ... Read Answer >>
  3. What are the differences between regressive, proportional and progressive taxes?

    Understand the differences between the most common tax systems including regressive taxes, proportional taxes and progressive ... Read Answer >>
  4. What is the difference between a regressive tax and proportional tax?

    Learn about the differences between regressive, progressive and proportional taxes and how they each affect everyday finances ... Read Answer >>
  5. In what types of economies are regressive taxes common?

    Understand the three main taxation systems, regressive, proportionate and progressive, and learn where regressive tax systems ... Read Answer >>
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center