Regressive tax

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A regressive tax is a tax which takes a larger percentage of income from people whose income is low. Often it is a fixed tax — every person has to pay the same amount of money, such as a poll tax (a “head” tax, which may be a tax to vote). Alternatively, it may be a tax on consumption such as VAT.

A regressive tax places proportionately more of a burden on those with lower incomes. Regressive taxes, as opposed to progressive taxes, are more burdensome on lower-income individuals than on higher-income individuals and corporations.

Even non-income taxes can be regressive relative to income. 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 one more likely to be carried out by the poor and less likely to be carried out by the rich, then the tax is 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.

Advocacy and criticism

Supply-side economics advocated regressive taxes as a means to solve the problem of stagflation. There is considerable debate as to whether regressive taxes are such a solution, in practice and in theory. It should be pointed out that the highest tax bracket in the United States before President Ronald Reagan was 70%, a percentage viewed by some as being too high, and thus straining the main arguments for progressive taxes. Opponents of this high tax rate for the rich (or high tax rates for the rich in general) argue that it lowers the incentive to work and innovate, while proponents argue that since the rich are still indeed rich, their incentive is left intact (or, alternatively, they may argue that most of the rich no longer work and innovate once they reach a certain level of wealth, or at least have no particular need to do so in order to maintain their lifestyle). It should be taken into consideration that high taxes on the rich could reduce their ability to expand their businesses and thus fewer jobs to be had. Finally, it should also be pointed out that currently (as of 2004) the highest tax bracket in the United States is 35%, one of the lowest in the world; however, many American states levy their own income tax in addition to the federal rate and added with Social Security which is also taxed based on income, can amount to half or near half of an individual's income.

It is natural to expect that some of those individuals and organizations which benefit most directly and most tangibly from a regressive tax (namely wealthy individuals and corporations), will advocate such a tax regardless of the mainstream positions for and against. Therefore it is suggested by detractors that regressive taxes are the darlings of the wealthy and of special interest groups. There are indeed numerous lobbies and political groups devoted to regressive taxes. Virtually all opponents of regressive taxation note that a regressive tax effectively punishes the poor for being poor, placing a higher burden on those least able to bear that burden.

Examples of regressive taxes

Some payroll taxes, such as the Social Security payroll tax in the United States. For the U.S. Social Security tax, the rate is 12.4% on an amount of income adjusted annually for inflation (e.g., $94,200 for the year 2006). Half of the tax is withheld from the employee's pay with the other half being paid by the employer. By contrast, self-employed individuals pay the entire amount of applicable Social Security tax (but again, only on the annually adjusted income amount). Whether this tax should properly be called regressive is disputed because the untaxed income cannot be counted in the benefit formula for computing retirement benefits. Therefore, this limit could be taken as a penalty on high-income earners (they are denied the ability to fully participate in the Social Security retirement program). Conversely, it can be argued that they can invest the untaxed portion of their income and earn higher returns than a majority of Social Security recipients earn on the money they contribute to that program. There is a similar set up with the British National Insurance contributions which does not apply to unearned income and to income above an Upper Earnings Limit.

Value-added tax or other sales tax on food and other essentials such as clothing, transport, and residential rents. Since the income elasticity of demand of food is usually less than 1 (see Engel's law), it tends to take up a higher percentage of the budget of a person or family with a lower income.

Property tax is often called regressive, though it has also been cited as a progressive tax. Since the income elasticity of demand of housing is usually less than 1 and property taxes contribute to the cost of owning or renting housing, it often takes up a higher percentage of the budget of a person or family with a lower income. Whether this tax should properly be called regressive is disputed.

First, only a fraction of property is used for housing. Most of the value held in property is tied to agricultural, manufacturing, and office facilities. This is both due to the greater area used for these purposes and the much greater value of the improvements which are often associated with the same.

Second, high-income owners tend to own substantially (and disproportionately) more property, either directly or through companies in which they hold stock. They also tend to own more industrial, retail, and office property than low-income earners. This effect is seen very strongly in municipalities financies. Those towns and cities with a large number of ratables (commercial property excluding rental housing) raise substantially more revenue than towns of equal wealth and size but fewer ratables.

Thus, property taxation is more often progressive in practice.

However, William H. Gates, Sr. came to a different conclusion in a 2003 study of tax schemes California, Idaho, Oregon, and Washington, finding that property taxes were regressive by one to three percent (depending on the state), between the lowest and highest income brackets.

A poll tax 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.

Regressive tax

Advocacy and criticism

Examples of regressive taxes

See also