Which of the following best describes a regressive tax?
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Regressive taxes are applied uniformly, and they do not change based on an individual’s level of income. A regressive tax system affects low-income taxpayers more than high-income taxpayers because it takes a higher percentage of their earnings. Show
A great example of a regressive tax is the 5% Goods and Services Tax (GST). For example, say a doctor earns $175,000 annually and a retail worker earns $30,000 annually. They both purchase a laptop for $1,000, and are charged $50 GST ($1,000 X 5%). Although the $50 GST amount is the same for both the doctor and the retail worker it is a higher percentage of the retail workers overall income. This is known as a regressive tax because it has a larger percentage impact on lower income individuals. Progressive taxes are the opposite of regressive taxes. Progressive taxes increase based on your taxable income. Canada has a progressive income tax system; therefore, high-income taxpayers pay a progressively higher percentage of tax than low-income taxpayers. Using our previous example, because of the doctor’s higher annual income, the doctor will have to pay more taxes than the retail worker based on Canada’s federal tax rates of 2022.  Doctor Teacher A flat tax system applies the same tax rate regardless of an individual’s income. For example, if the tax rate is set at 15%, a taxpayer earning $20,000 pays $3,000 (15%) and someone making $300,000 pays $45,000 (15%) worth of taxes. Canada does not have a flat tax system, but at one point, the province of Alberta had a flat provincial tax system from 2001 to 2015. Flat taxes are sometimes referred to as proportional taxes. Interactive Content (Author: Cynara Almendarez, January 2019). Interactive Content (Author: Joyce Hards, April 2019) Interactive content (Author: Matthew Amisano, January 2020) References and Resources: January 2019 Media not mentioned below is licensed under a CC BY-NC-SA(Attribution NonCommercial ShareAlike) and owned by the author of the text. Orjan F. Ellingvag/Dagens Naringsliv/Corbis via Getty Images A regressive tax is one that imposes a harsher burden on lower-income households than on households with higher incomes. In lower-income families, a larger proportion of their income pays for shelter, food, and transportation. Any tax decreases their ability to afford these basics. Regardless of your income level, it is important to understand how these taxes affect your income so that you can make more informed decisions regarding your financial circumstances—such as when you are voting on new tax laws, making purchases, or creating a budget. Key Takeaways
What Is a Regressive Tax?Higher-income families, on the other hand, have no problem affording the basics. Taxes can decrease their ability to invest in stocks, add to retirement savings, or purchase luxury items. They may affect their standard of living but won't deprive them of living essentials. The Bureau of Labor Statistics annual Consumer Expenditure Survey found that the lowest-earning fifth of the population spent an average of $28,724 in 2020. Of that, they spent $12,317 on housing, $4,099 on food, and $4,363 on transportation. They only spent $610 on retirement savings and personal insurance. The highest-earning fifth spent $114,840 that year. Of that, they spent $36,645 on housing, $12,245 on food, and $16,796 on transportation. They spent $19,952 on retirement savings and insurance. The following chart illustrates the typical spending statistics by quintiles (fifths) of the population. Types of Regressive TaxesA regressive tax takes a higher proportion of earnings from lower-income households than those with higher incomes. This is because they are taxed the same when consuming as higher earners—$100 when shopping is worth more to a lower-tiered earner than it is to a higher-tiered earner, so taxes take more from them. The Institute on Taxation and Economic Policy found that the lowest-earning fifth paid 11.4% of their income in state and local taxes. These include sales, property, and income tax. Most of the highest-earning fifth paid from 8% to 8.9%, and the highest-earning 1% paid only 7.4% of their income. The lowest-earning group paid the highest percentage of income in sales tax, while the highest-earning group paid at higher rates in income tax. Consumption TaxesMost consumption taxes are regressive. The only progressive consumption tax—taxes that increase based on income—are those on luxury items, such as fine jewelry, yachts, and private jets. Sales TaxesSales taxes are applied as a percentage of sales prices. States apply them to most goods except for groceries, prescription drugs, and housing. Many states also levy them on certain services. By omitting these taxes from food, shelter, and health costs, they become less burdensome on lower-income earners. Excise TaxesAn excise tax is a flat tax imposed on specific items such as fuel, tobacco, and alcohol. It becomes more regressive if it is imposed on goods and services that lower-income families are more likely to use. NoteCigarette taxes are the most regressive excise tax. Tobacco is taxed very heavily. Cigarettes are levied by federal, state, and local governments on each pack. The cigarette tax is regressive on two levels. First, the tax takes a larger percentage of income. Second, lower-income earners are more likely to smoke. One-fifth of adults with an income under $35,000 smoked in 2019, while about 7% of those who earned more than $100,000 smoked. Alcohol taxes, on the other hand, aren't as regressive. A 2021 Gallup Poll found that 44% of those earning less than $40,000 reported they drink, while 62% of those with incomes from $40,000 up to $100,000, and 81% of those with incomes of $100,000 or more, drink. Gasoline TaxThe gasoline tax is a mildly regressive excise tax. The federal gas tax was 18.4 cents per gallon, while the average state tax was 30.63 cents per gallon, as of July 2021. It's regressive because lower earners are still paying the same percentage as higher earners. The gas tax is also a Pigouvian tax (a tax on activities or items that can cause negative effects on others), with its own set of pros and cons. Fuel taxes are designed to cover the cost of road usage and environmental impacts. TariffsTariffs are excise taxes levied on imports. They are regressive because they raise the price of goods and services. To cover the price of the tax, retailers must raise the prices they charge, effectively passing the tax on to consumers. The United States imposes tariffs on food, manufactured goods, chemicals, and clothing. It waives tariffs on imports from countries with which it has free trade agreements. Value-Added TaxThe value-added tax (VAT) is a special type of excise tax not used in the U.S. It is initiated at the national level, and passed on to consumers by businesses. It is popular in the European Union and other countries, but the U. S. may not be able to make it work because it would take the place of state sales taxes—which are not simple to replace with a one-size-fits-all tax. User FeeA user fee is a government charge to use public facilities or services. States charge a fee to drive on toll roads. The National Park Service charges admission to its facilities. Some states charge prisoners fees for health care. Cities charge admission to municipal golf courses and tennis facilities. They also charge fees for services such as building permits, vehicle registration, inspection fees, and zoning hearings. This is a politically acceptable way to raise revenue without increasing tax rates. User fees are regressive because they take a larger percentage of low incomes. NoteAny other tax that confers an advantage to wealthy individuals is regressive. Payroll TaxesMedicare and Social Security withholding are payroll taxes that are also collectively known as FICA (Federal Insurance Contributions Act) taxes. At a certain level of income, withholding for Social Security is capped, but there is no cap on earnings for the Medicare tax, which is 1.45% of income. Employees pay 6.2% of their income, up to the limit of $147,000 in 2022 and $160,200 in 2023, for the Social Security tax. Once a worker earns more than that amount, they don't have to pay any more Social Security tax for the year. For example, if a high-income worker earned the limit by the end of September, they would not have to pay any more payroll tax for the rest of the year—in contrast to a worker who earns $50,000, who pays throughout the year. NoteThe Affordable Care Act instituted a 0.9% Medicare tax on high-income earners: those who make more than $200,000, for individual filers, or $250,000, for married couples filing jointly. That's in addition to the regular 1.45% Medicare tax. Is a Flat Tax a Regressive Tax?A flat tax is an alternative income tax that applies the same rate to every income level. Technically, it's not a regressive tax because the rate is the same, but it does impose a greater burden on lower-income families—they end up reducing their spending on the basics to pay it. Frequently Asked Questions (FAQs)How are regressive taxes and progressive taxes similar?Both taxes are based on a percentage of a taxpayer's income rather than a flat tax rate, but the amount of the percentage increases for low-income taxpayers in a regressive system. It increases for high-income taxpayers in a progressive system. What taxes aren't regressive?The U.S. income tax system isn't regressive, nor is the federal estate tax. Both impose a higher tax rate as income or value increases. Was this page helpful? Thanks for your feedback! Tell us why! Other SubmitSources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
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