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A regressive tax is a tax which takes a larger percentage of income from people whose income is low. It 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.
Many taxes not based on income will appear to be regressive in an income sense, including property, wealth and expenditure taxes, since people with high levels of assets and expenditure will pay such taxes even if they have minimal incomes. However some such individuals may have a greater ability to pay while maintaining a high standard of living than others with higher but still moderate incomes and lower levels of assets or expenditure.
Advocacy
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 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). 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.
Detractors
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. In fact there are numerous lobbies and political groups devoted to regressive taxes.
Examples of Regressive Taxes
- Some payroll taxes, such as the Social Security payroll tax in the US. Its rate is 12.4% on income under $87,000 (only half of that is visible to wage-earners, but all of it must be paid by the self-employed) but 0% on higher incomes. 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 fully participate in the Social Security Retirement program).
- Value-added tax or other sales tax on food. 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. 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.
- A poll tax is a fixed tax for each person: since each person pays the same amount, it is a lower proportion for people with higher incomes.
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