Regressive tax v. progressive tax: What to know about how your money is being taxed (2024)

FAQs

Regressive tax v. progressive tax: What to know about how your money is being taxed? ›

The major difference between regressive and progressive taxes is who pays more. For a regressive tax, low-income earners pay more than middle- and high-income earners. For a progressive tax, higher income earners pay more than their lower income peers.

progressive tax—A tax that takes a larger percentage of income from high-income groups than from low-income groups. proportional tax—A tax that takes the same percentage of income from all income groups. regressive tax—A tax that takes a larger percentage of income from low-income groups than from high-income groups.

A progressive tax takes a larger percentage of income from high-income groups than from low-income groups and is based on the concept of ability to pay. A progressive tax system might, for example, tax low-income taxpayers at 10 percent, middle-income taxpayers at 15 percent and high-income taxpayers at 30 percent.

What Is a Regressive Tax? The term regressive tax refers to a tax that is applied uniformly regardless of income. Regressive taxes take a larger percentage of income from low-income earners than from middle- and high-income earners. As such, the tax burden decreases with regressive taxes as income rises.

Property taxes are an example of a regressive tax; the U.S. federal income tax is a progressive tax example; and occupational taxes are a type of proportional tax. Regressive taxes have a greater impact on lower-income individuals than on the wealthy.

The major difference between regressive and progressive taxes is who pays more. For a regressive tax, low-income earners pay more than middle- and high-income earners. For a progressive tax, higher income earners pay more than their lower income peers.

Progressive taxes take more from those able to pay more. Because this method is based on the ability to pay, it is considered the fairest means of taxation. People with higher incomes pay larger amounts of tax because their taxable income is larger.

If, for example, taxes for a family with an income of $20,000 are 20 percent of income and taxes for a family with an income of $200,000 are 30 percent of income, then the tax structure over that range of incomes is progressive.

Though true regressive taxes are not used as income taxes, they are used as taxes on tobacco, alcohol, gasoline, jewelry, perfume, and travel. User fees often are considered regressive because they take a larger percentage of income from low-income groups than from high-income groups.

On the one hand, a regressive tax system can generate revenue and finance public goods and services. On the other hand, a regressive tax system can exacerbate income inequality, reduce economic mobility, and slow economic growth.

Who do regressive taxes hurt the most? ›

A regressive tax is one where the average tax burden decreases with income. Low-income taxpayers pay a disproportionate share of the tax burden, while middle- and high-income taxpayers shoulder a relatively small tax burden.

Those who earn more are taxed more. Since the top earners are taxed more and on larger sums of money, a progressive tax also increases the amount of tax revenue coming in.

A regressive tax may seem to be an equitable form of taxation because everyone, regardless of income level, pays the same fixed amount. In reality, however, such a tax causes lower-income groups to pay a greater proportion of their income than higher-income groups pay.

A progressive tax when the tax rate increases as the taxable amount increases. A regressive tax takes a big % away from poor people. A flat tax is when everybody pays the same amount of tax.

Regressive taxes benefit higher-income individuals since taxes decrease as income increases. With progressive taxes, however, taxes are based on an individual's specific amount of taxable income, and the tax rates increase as income increases.

For example, our income tax system is progressive because it imposes a lower tax rate on low-income earners than on those with a higher income. Tax brackets group taxpayers by income ranges, and high-income taxpayers pay a larger share of the overall tax burden than low-income taxpayers.

Though true regressive taxes are not used as income taxes, they are used as taxes on tobacco, alcohol, gasoline, jewelry, perfume, and travel. User fees often are considered regressive because they take a larger percentage of income from low-income groups than from high-income groups.

A regressive tax is one where the average tax burden decreases with income. Low-income taxpayers pay a disproportionate share of the tax burden, while middle- and high-income taxpayers shoulder a relatively small tax burden.