Regressive tax: Difference between revisions - Wikipedia

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{{Merge-multiple-to|Progressive tax|Proportional tax|target=Tax progressivity|discuss=Talk:Progressive tax#Merge / Split Restructuring|date=February 2008}}

{{Public finance}}

A '''regressive tax''' is a [[tax]] imposed so that the effective [[tax rate]] decreases proportionately as the amount to which the rate is applied increases.<ref>[http://www.merriam-webster.com/dictionary/Regressive Webster] (3): decreasing in rate as the base increases (a regressive tax)</ref><ref>[http://www.bartleby.com/61/71/R0127100.html American Heritage] (3). Decreasing proportionately as the amount taxed increases: a regressive tax.</ref><ref>[http://dictionary.reference.com/browse/regressive Dictionary.com] (3).(of tax) decreasing proportionately with an increase in the tax base.</ref><ref>[http://www.encyclopedia.com/doc/1B1-376673.html Britannica Concise Encyclopedia]: Tax levied at a rate that decreases as its base increases.</ref> The term "regressive tax" describes a distribution effect, which can be applied to any type of tax system (income or consumption) that meets the definition. It is frequently applied in reference to fixed taxes, where every person has to pay the same amount of money. The term ''regressive'' refers to the way the rate progresses from high to low. The opposite of a regressive tax is a [[progressive tax]], where the tax rate increases as the amount to which the rate is applied increases. In between is a [[proportional tax]], where the tax rate is fixed as the amount to which the rate is applied increases. Regressive taxes reduce the [[tax incidence]] of people with higher incomes, as they shift the incidence disproportionately to those with smaller incomes.

The regressivity of a particular tax often depends on the propensity of the tax payers to engage in the taxed activity relative to their income. In other words, if the activity being taxed is more likely to be carried out by the poor and less likely to be carried out by the rich, then the tax may be considered regressive. To determine whether a tax is regressive, the [[Income elasticity of demand|income-elasticity]] of the good being taxed as well as the income-substitution effect must be considered. A simplified illustration of a regressive tax on income (proportional on consumption) is as follows: If Jane has $10 and John has $5, a tax of $1 on a purchase would result in a different percentage of total income applied to taxation, 20% for John and 10% for Jane. Thus, a tax that is fixed to the value of the good/service (without exemptions or rebates) would likely, in effect, result in a higher burden of taxation to people with less money (depending on consumption level and timeline examined - year or lifetime). A regressive tax system does not mean and likely would not result in low income earners paying more taxes than the wealthy, only that the effective tax rate relative to income or consumption would be a larger tax burden to low income earners.