A tax with a rate that decreases as the taxpayer's income increases.
The result of a regressive tax is that the lower-income taxpayer pays a larger percentage of his or her income in taxes than does the higher-income taxpayer. The opposite of the regressive tax is the progressive tax. With progressive taxes, such as the federal income tax, the effective tax rates increase as the taxpayer's income increases. The proportionate tax rate, also referred to as a flat tax rate, remains constant as income rises. Under a proportionate tax system, higher-income individuals pay a greater amount of taxes than lower-income individuals pay, but the ratio is identical.
Consumption taxes, which are taxes on consumer goods and services, are usually regressive because individuals with lower incomes spend a larger portion of their income on these goods and services than higher-income individuals do. Some examples of these consumption taxes are the taxes on alcohol and tobacco, also referred to as "sin taxes."
Some taxes can be a combination of the different tax rates. For example, the social security tax is proportional until the taxpayer reaches the maximum income level. However, once the taxpayer's income reaches the maximum cap, all income earned over the cap is not taxed. The result is a regressive tax because the individual earning in excess of the maximum income level is paying a lower percentage of her or his income in taxes than the lower-income individual is paying.
Congressional Research Service. 1990. Would a Social Security Tax Cut Increase Progressivity? CRS 90-235 RCO. Washington, D.C.: Congressional Research Service.
Howard, Jay M. 1992. "When Two Tax Theories Collide: A Look at the History and Future of Progressive and Proportionate Personal Income Taxation. Washburn Law Journal 32.
Samuels, Leslie B. 1995. "Remarks of Leslie B. Samuels." Federal Bar Association Section of Taxation Report 11.
A tax is a compulsory payment imposed by a government for public purposes. There are two major forms of tax assessment; direct taxes, which are imposed on an individual directly, and indirect taxes, which are imposed on a privilege or right which a person exercises. For example, the right to buy or sell real estate involves estate and inheritance taxes, or the right to make gifts of property involves gift taxes. In general, all taxes may be classified as proportional, imposing proportional rates on all incomes or property values, whether large or small; progressive, where taxes are graduated to impose the highest rates on the highest incomes, based on ability to pay; and the regressive tax, which that takes a smaller percentage from higher income individuals than from lower income individuals.
A regressive tax is a tax that is graduated so as to impose the highest rates on the lowest incomes and property value. For instance, overall, Social Security is a regressive tax because there is a maximum income limit beyond which no further taxes are paid. Therefore, very wealthy individuals pay a lower percentage of their total income to Social Security than do lower income individuals. Throughout the U.S. tax code there are many examples of regressive taxes, despite efforts to use more proportional or progressive taxes to create a fairer system.
See also: Progressive Tax, Proportional Tax