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Regressive Tax

Moneyzine Editor
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Moneyzine Editor
1 mins
September 25th, 2023
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Definition

The term regressive tax refers to any system of taxation that causes lower-income individuals to pay a higher proportion of their income than higher-income individuals. When a tax is regressive, the average rate of tax paid declines as income increases.

Explanation

When a system of taxation is regressive, the average tax rate paid by an individual will decrease as their income increases. Such policies are considered "regressive" because they place a larger proportion of the tax burden on lower-income individuals, which is in contrast to progressive taxes that are based on the "ability to pay" principle.

Generally, a regressive tax is one that is applied uniformly, such as a flat tax. Excise taxes imposed on tobacco and gasoline are examples of regressive taxes since everyone that purchases a gallon of gasoline or a pack of cigarettes pays the same amount of tax.

The term regressivity is used to describe the degree to which a tax affects lower-income individuals. The regressivity of a tax is a function of the elasticity of demand for the items being taxed. Sales tax on food and other essential items is considered highly regressive. Since all individuals need to eat to survive, demand for food is relatively inelastic. That is to say, lower-income families spend a higher proportion of their income on food; therefore, they pay a higher proportion of their income in sales tax.

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