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.
What Are Some Examples of a Regressive Tax?
The burden of a tax results from both the design of a tax and the true economic burden of a tax. A regressive tax is often flat in nature, meaning that the same rate of tax applies (generally) regardless of income. These taxes include most sales taxes, payroll taxes, excise taxes, and property taxes.
Because the same rate of tax applies regardless of one’s income, a lower-income individual may face a higher tax burden than a higher-income individual with the same amount of consumption.
For example, if two individuals who make $20,000 and $40,000 spend $100 on clothing with a 5 percent sales tax rate, the lower-earner will be paying more taxes as a share of their income than the higher-earner. The same can be true of two neighbors with similar property values and property tax burdens. They will pay the same level of property taxes regardless of their income.
How Regressive Are Excise Taxes and Tariffs?
Excise taxes are particularly regressive. Households in the lowest one-fifth by income faced an average federal excise tax rate that is nine times greater than the average excise tax rate faced by the top 1 percent of households.
The distributional effects of a tariff (the economic burden it places on households across income levels) tend to be regressive, burdening lower-income households more than higher-income households. Tariffs ultimately fall on the factors of production and reduce taxpayer labor and capital income. This occurs either by raising prices or reducing wage and capital income.
Analysis of imposed and threatened U.S. tariffs under the Trump administration (as of December 2018) shows that lower- and middle-income households experience relatively larger drops in after-tax income.
Combined Distributional Impact of Imposed and Threatened U.S. Tariffs as of December 2018| Income Percentile | Change in After-Tax Income |
|---|
| Lowest Quintile (0% to 20%) | -1.37% |
| Second Quintile (20% to 40%) | -1.32% |
| Middle Quintile (40% to 60%) | -1.37% |
| Fourth Quintile (60% to 80%) | -1.31% |
| Top Quintile (80% to 100%) | -1.14% |
| All | -1.22% |
| Addendum: |
| 80% to 90% | -1.25% |
| 90% to 95% | -1.24% |
| 95% to 99% | -1.18% |
| 99% to 100% | -0.95% |
| Source: Tax Foundation Taxes and Growth Model, April 2018 |
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FAQs
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.
What is the most regressive tax? ›
In contrast to the personal income tax, the sales and use tax is regressive.
Is a regressive tax good or bad? ›
Regressive taxes may seem fair because they are imposed on everyone regardless of income, but they hurt low-income earners more than others. That's because they spend a larger portion of their income on regressive taxes than people who earn more.
What is an example of a progressive tax? ›
A progressive tax is a tax system that increases rates as the taxable income goes up. Examples of progressive tax include investment income taxes, tax on interest earned, rental earnings, estate tax, and tax credits.
What best describes a regressive tax? ›
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.
Are payroll taxes regressive? ›
The individual and corporate income taxes and the estate tax are progressive. By contrast, excise taxes are regressive and payroll taxes for Social Security and Medicare are regressive at the top of the income distribution (see figure 2).
Who is hurt by regressive taxes? ›
Most state tax systems are regressive, meaning lower-income people are taxed at higher rates than top-earning taxpayers. Further, those among the top 5 percent of households pay a smaller share of all state and local taxes than their share of all income, while the bottom 95 percent pay more.
Which states have regressive taxes? ›
In most states, 36 in all, the poorest residents are taxed at a higher rate than any other group. The most regressive states in terms of taxation are, in order, Florida, Washington, Tennessee, Pennsylvania and Nevada. The least regressive jurisdictions are DC, Minnesota, Vermont, New York and California.
Why do the rich pay less taxes? ›
In contrast to the 99% who earn most of their income from wages and salaries, the top 1% earn most of their income from investments. From work, they may receive deferred compensation, stock or stock options, and other benefits that aren't taxable right away.
Who pays more in a regressive tax? ›
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.
Social Security was always intended to be a regressive tax (6.2% up to a limit of $160,200 for 2023, then 0% above that) with a regressive payout (currently, payments are 90% of your Average Indexed Monthly Earnings, or AIME, up to $1115, 32% of AIME from $1116 to $6721, and 15% of AIME from $6722 up to the maximum ...
Who pays the most on progressive taxes? ›
Those who earn less are taxed at a lesser rate. Those who earn more are taxed at a higher rate. This concept is known as ability-to-pay taxation. The top earners are taxed more and on larger sums of money so a progressive tax increases the amount of tax revenue coming in.
What is a federal tax on money inherited from a deceased loved one? ›
There is no federal inheritance tax. Inherited assets may be taxed for residents of Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Whether you may pay inheritance tax depends on the amount of the inheritance, your relationship to the decedent, and the state in which the decedent lived.
Do you pay the same tax rate on all income? ›
The United States uses a progressive tax system, which means different portions of your income are taxed at different rates and that typically the more taxable income you have the higher the tax rate.
How many tax brackets does the IRS have? ›
Federal Income Tax Brackets Overview
The U.S. currently has seven federal income tax brackets, with rates of 10%, 12%, 22%, 24%, 32%, 35% and 37%. If you're one of the lucky few to earn enough to fall into the 37% bracket, that doesn't mean that the entirety of your taxable income will be subject to a 37% tax.
What is the difference between a flat tax and a regressive tax? ›
The sales tax is an example of a proportional tax because all consumers, regardless of income, pay the same fixed rate. Although individuals are taxed at the same rate, flat taxes can be considered regressive because a larger portion of income is taken from those with lower incomes.
Is social security a regressive tax? ›
Social Security was always intended to be a regressive tax (6.2% up to a limit of $160,200 for 2023, then 0% above that) with a regressive payout (currently, payments are 90% of your Average Indexed Monthly Earnings, or AIME, up to $1115, 32% of AIME from $1116 to $6721, and 15% of AIME from $6722 up to the maximum ...
Is luxury tax progressive or regressive? ›
Tax revenue is redistributed through government programs that benefit all. The luxury tax is a progressive tax. Goods or services taxed as luxury goods give them an appeal that can make people want to own them even more. There is a certain prestige in owning an item that is considered a luxury.
Is a tax on food an example of a regressive tax? ›
The 5 percent sales tax on food is an example of a regressive tax, as it takes a higher percentage from low-income individuals than high-income individuals. The correct answer is (d) Regressive Tax.
