Regressive Taxation: What is Regressive Tax System

Taxes are an important aspect of a country's economy and its financial growth. Different kinds of taxes are imposed on the people of a country, in order to generate finances for various purposes. These purposes may include the expenditures made on war, the enforcement of law, economic growth, development of infrastructure and the functioning of the government itself. Public services, like, education systems, health care systems, transport and unemployment benefits are also funded by taxes. A tax may be progressive, regressive, or proportional, depending on various factors. Regressive taxation refers to the taxation that imposes a greater tax burden on the poor, as compared to affluent people. It creates a contrasting relationship between the tax rate and the capability of the tax payer to pay the tax, based on the consumption, income or the assets that the taxpayer possesses.

A regressive tax system shifts the burden of taxes disproportionately to the side of poor, tending to reduce the burden on people with high paying capabilities. It involves a form of taxation which is somewhat unjust to the lowly paid individuals, relative to their incomes, as a uniform tax is levied on both categories of people (highly paid as well as lowly paid). Regressive taxation is used in reference to fixed taxes, where every individual is taxed an equal amount of money, irrespective of his level of income. For example, federal and state taxation of cigarettes is considered as regressive, as the low-income smokers pay a higher rate of taxation in terms of their income as compared to the high-income smokers. However, on a positive side, the professed advantage of such taxation is that it helps to free more finances for investment, from the high-income individuals, as they tend to save a greater portion of their income.

Difference Between Progressive and Regressive Tax

Progressive taxation refers to a form of taxation where the percentage of income paid by an individual, increases with increasing income. People with higher income pay more total taxes imposed at a higher rate. Thus, a person with an income of $200,000 may pay a tax of $20,000 (at a tax rate of 10%), whereas a person with an income of $50,000 may pay a tax of $4,000 (at a tax rate of 8%). In case of regressive taxation, the proportion of income which is paid in taxes, decreases with an increase in income. This is in direct contrast to progressive tax, where the proportion paid as taxes, rises as the income increases. Sales tax on grocery products is also considered to be a form of regressive taxation because of the fact that a poor individual pays the same amount of tax as a wealthy person. The U.S. Taxation system contains a mixture of both progressive and regressive taxes.

A regressive tax system also includes the taxes imposed on essentials, like, transport, housing and clothing. This is because the income elasticity of the demand for these essentials is less, thus increasing the percentage of a lowly paid individual's budget which is taken as tax. Taxes on alcohol and tobacco are also a form of regressive taxation because both the lowly paid and highly paid individuals consume these products. Taxation on property also sometimes comes under this because the property taxes take up a higher percentage of an individual's budget who has a low income, than it does for an individual with a higher income.