A regressive tax is a tax that takes a greater percentage of income from those who earn less, than from those with a higher income. In other words, low income people pay more, relative to their earnings, than wealthy people. A regressive tax is the exact opposite of a progressive tax, which takes the larger percentage from those who earn a higher income. Examples of regressive taxes include sales taxes and property taxes, which are set at a flat percentage, regardless of who the purchaser or owner is. To explore this concept, consider the following regressive tax definition.
Definition of Regressive Tax
- A tax that takes a higher %age of income from low-income earners than from high-income earners.
What is Regressive Tax
A regressive tax is one which taxes everyone at the same rate, regardless of their income level. While a regressive tax may seem fair at first glance, actually takes a higher percentage of lower-income earners’ income, than it does from those who earn more. True regressive taxes are those levied upon products like food, tobacco, alcohol, and gasoline, as well as fees for driver’s licenses, parking permits, museum and park admissions, and tolls for accessing roads, tunnels, and bridges.
The IRS explains regressive tax in this way:
If someone earns $10,000 per year and pays 20% of his income in taxes, then that tax cost him $2,000. Yet, if a higher-income earner makes $50,000 per year, he pays only 4% of his income to meet that $2,000 tax. The more the individual makes, the less he will feel the imposed tax; so someone who makes $100,000 per year will only have to fork over 2% of his income to pay the same $2,000 tax.
Different Methods of Taxation
Regressive tax, progressive tax, and proportional tax are all different methods of taxation, though each one targets a different group, and specifies how the tax is to be calculated.
A progressive tax is the exact opposite of a regressive tax, in that the more an individual earns, the higher the tax rate becomes. This means that someone with a high income will be charged a larger %age on his or her income.
For instance, if someone earns $10,000 per year, with a progressive tax rate of 10 %, he would be responsible for paying $1,000 a year. Meanwhile, his neighbor, who earns $50,000 per year, may be taxed at 20%, which totals $10,000 per year in taxes. In most cases, progressive tax rates are capped by law.
A proportional tax, or a “flat rate tax,” taxes everyone at the same rate. For instance, if an income tax was set at 20%, a person earning $10,000 will be responsible to pay $2,000 in taxes. Someone who earns $50,000 will be responsible to pay $10,000 in taxes. Other taxes are levied as proportional tax, charged at the same rate to everyone, regardless of their income level.
These include such things as sales tax, and hotel room tax, each of which is calculated based on the amount being charged for the item. For instance, if a city’s hotel room tax is 5%, and Jorge is booking two nights at a price of $100 per night, he will pay the same amount in taxes, $10, whether he earns only $1,000 per month, or $100,000 per year. Property tax is also a proportional tax, as it is based on a percentage of the property’s value, regardless of who owns it. Proportional tax is considered to be a neutral tax.
Income Tax in the U.S.
Income tax is the federal tax that all United States citizens pay on their wages, and it is a progressive tax. Higher-income people, for example, pay a higher percentage of income tax, though these taxes are often offset by credits and loopholes. Payroll taxes, such as Social Security and Medicare, are proportional taxes, for the most part. Taxpayers are required to pay into these programs at a flat (proportional) rate, until their income exceeds a certain level. It is the setting of this income threshold that makes Medicare a progressive tax as well.
Regressive Tax Categories
Regressive taxes, by their very nature, take a higher percentage of income from smaller paychecks than they do from larger paychecks; and there isn’t one blanket regressive tax that covers everything. There are actually different examples of regressive tax, including sales tax, property tax, and user fees. A description of each of these categories is provided below:
Sales taxes are applicable to everyone, in that they are charged on items that any consumer might buy. The amount of sales tax on an item is based on its overall cost. Sales tax rates are uniform, regardless of the income level of the buyer. Those who have a lower income are more affected by sales tax than others with a higher income.
Two people spend $500 per month for groceries at the local mega-mart. The sales tax rate in their state is 8%, so both shoppers pay $40 in sales tax on these purchases each month. Over a year’s time, this adds up to a sales tax of $480. This affects each of them differently. The shopper who earns only $11,000 per year finds this to be a greater burden than the shopper who earns $100,000 per year. While sales tax is a flat rate, or proportional, tax, it has greater consequences for low-income consumers.
Property taxes are levied at a flat rate based on the value of the property, so if two people own homes of equal value in the same neighborhood, they pay the same amount in property tax, regardless of their income level. Property tax is considered to be regressive, because it is based on the value of the property. What this means is that, because low-income families tend to live in less expensive homes, they have lower property tax rates, as opposed to those who live in pricier neighborhoods. For a tax to be truly regressive, it must remain the same, no matter the value of the property, who lives on it, or where it’s located.
User fees are another regressive tax levied by the government. These are the fees that people pay to use government-funded museums, parks, and beaches, as well as the fees to obtain driver’s licenses and ID cards, as well as tolls paid to access roads and bridges. An example of regressive tax at work here can be seen when the Smith and Jones families travel to a government-funded museum, which charges a fee of $25 per person for admission. For the Smith family, whose income is about $26,000 per year, the fee amounts to a larger portion of their income than the Jones family’s, who earn about $100,000 per year.
When it comes to regressive tax at the state level, no one has it worse in the United States than Washington. According to a 2015 Who Pays? Report, issued by the Institute on Taxation and Economic Policy, lower-income families pay nearly 17% of their incomes in state and local taxes, while the wealthiest families (i.e. the “one percent”) pay about 2.5% of their income in taxes.
To put this into proper perspective, in Alaska, low-income families pay about 7% of their income in taxes, while the wealthiest pay 2.5%. The spread is even closer in states like Idaho (8.5 % paid by low-income families and 6.4% paid by the wealthier families) and Oregon (8.1% paid by low-income families and 6.5% paid by the wealthier families).
These numbers all prove, for many people, that states tax their people unfairly, using a regressive tax scheme, but Washington appeared hit the hardest. Washington isn’t alone, though, as there is also a significant regressive tax spread in Arizona, Florida, Illinois, Indiana, Kansas, Pennsylvania, South Dakota, Tennessee, and Texas. These states make up what the institute calls the “Terrible Ten.” Conversely, states that enjoy a much closer regressive tax spread between the two classes include California, Delaware, Minnesota, Montana, Oregon, Vermont, and Washington, D.C.
Why is the regressive tax spread so high in Washington? Here are a few reasons in particular:
- Washington’s voters have repeatedly voted down the idea of a personal income tax, and so the state does not have one in place.
- Because the state has no personal income tax, Washington relies more on sales taxes than other states do, which requires a larger chunk of people’s incomes.
- Washington has a higher tax rate on cigarettes than other states.
- Washington has put in place a refundable Earned Income Tax Credit, however lawmakers have neglected to actually fund the credit.
Another major problem in Washington is that they are still using the same tax system that was initially designed for the state back in the 1950s. This might not be an issue, had the state maintained its rural nature. Washington’s population, however, has increased exponentially in the last 60 years. Washington has also become more urban, requiring more infrastructure and government-provided services to accommodate its growing population.
Washington’s School Tax Rates
One area in particular that brings Washington’s unfair tax strategy to light, is its public school system. Because the government has not provided enough funding to pay for basic education, school districts have no choice but to rely on local property taxes for much-needed funding. Because property taxes vary by the income level in various neighborhoods, this resulted in an unintentional segregation, with children from higher-income families enjoying better-funded schools.
One suggestion has been for the wealthier residents to pay a slight increase in taxes, in order to pay for future students’ educations, helping to ensure that the state’s children have fair access to the state’s school systems, rather than being divided by their families’ incomes.
Related Legal Terms and Issues
- Infrastructure — the basic structures and facilities (such as buildings and roads) necessary in order for a society to function.
- Levy — the act of imposing a tax or fine.