Loading the player...

What is a 'Regressive Tax'

A regressive tax is a tax applied uniformly, taking a larger percentage of income from low-income earners than from high-income earners. It is in opposition to a progressive tax, which takes a larger percentage from high-income earners.

BREAKING DOWN 'Regressive Tax'

A regressive tax affects people with low incomes more severely than people with high incomes because it is applied uniformly to all situations, regardless of the taxpayer. 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. 

Although the United States has a progressive taxation system when it comes to income tax, meaning higher income earners pay a higher percentage of taxes each year compared to those with a lower income. But, we do pay certain levies that are considered to be regressive taxes. Some of these include state sales taxes, user fees, and, to some degree, 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 a 7 percent sales tax), lower-income consumers are more affected.

For example, imagine two individuals each purchase $100 of clothing per week, and they each pay $7 in tax on their retail purchases. The first individual earns $2,000 per week, making the sales tax rate on her purchase 0.35 percent of income. In contrast, the other individual earns $320 per week, making her clothing sales tax 2.2 percent 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 tossed 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, making it a regressive tax.

Sin Taxes

Taxes levied on products that are deemed to be harmful to society are called sin taxes. These are added to the prices of goods like alcohol and tobacco in order to dissuade people from using them. The Internal Revenue Service (IRS) considers these taxes to be regressive, because, once again, they are more burdensome to low-income earners rather than their high-income counterparts. 

RELATED TERMS
  1. Progressive Tax

    A progressive tax is a tax that puts a lower rate on low-income ...
  2. Flat Tax

    A flat tax system which applies the same tax rate to every taxpayer ...
  3. Tax Fairness

    Tax fairness is a tax system that aims to create a system of ...
  4. Tax Rate

    A tax rate is the percentage at which an individual or corporation ...
  5. Income Tax

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

    A statistical measure that attempts to determine the strength ...
Related Articles
  1. Taxes

    What All the Candidates’ Tax Plans Are Missing

    The presidential candidates have starkly different tax-reform proposals – but none of them gets to the real problem of America's tax system.
  2. Taxes

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
  3. Taxes

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
  4. Taxes

    The 7 Best States For Property Taxes, and Why

    Understand why some states have high property taxes while others have low property taxes. Learn about the states with the lowest property taxes.
  5. Taxes

    Who Does The Current Tax Code Benefit?

    Are the non-workers benefiting from the current tax code in any way or is it the wealthy who are still getting the big breaks?
  6. Insights

    How Fortune 500 Companies Avoid Paying Income Tax

    President Donald Trump is not alone in not paying taxes.
  7. Taxes

    Are Taxes the Solution for Income Inequality?

    Income inequality continues to increase. Why? And are taxes the solution?
  8. Taxes

    3 Ways To Avoid The Dividend Tax Hike

    Find out how you can offset the potential tax hikes.
  9. Taxes

    Comparing Long-Term vs. Short-Term Capital Gains Tax Rates

    An understanding of the taxation of long- and short-term capital gains is crucial to ensuring the benefits of your investment portfolio outweigh the costs.
  10. Taxes

    Parties For Taxes: Republicans Vs. Democrats

    Read about the political parties' differences in tax ideology, and how it can affect your paycheck.
RELATED FAQS
  1. 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 >>
  2. How does the marginal tax rate system work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. Read Answer >>
  3. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center