regressive tax
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A regressive tax is a
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regiona ...
imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, so that the average tax rate exceeds the marginal tax rate.Hyman, David M. (1990) ''Public Finance: A Contemporary Application of Theory to Policy'', 3rd, Dryden Press: Chicago, ILJames, Simon (1998) ''A Dictionary of Taxation'', Edgar Elgar Publishing Limited: Northampton, MA In terms of individual income and wealth, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich: there is an inverse relationship between the tax rate and the taxpayer's ability to pay, as measured by assets, consumption, or income. These taxes tend to reduce the tax burden of the people with a higher ability to pay, as they shift the relative burden increasingly to those with a lower ability to pay. The regressivity of a particular tax can also factor the propensity of the taxpayers to engage in the taxed activity relative to their resources (the
demographics Demography () is the statistical study of population Population typically refers to the number of people in a single area, whether it be a city A city is a human settlement of notable size.Goodall, B. (1987) ''The Penguin Dicti ...
of the tax base). 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, the tax may be considered regressive. To measure the effect, the income elasticity of the good being taxed as well as the income effect on consumption must be considered. The measure can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. The opposite of a regressive tax is a
progressive tax A progressive tax is a tax in which the tax rate increases as the taxable amount increases.Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), ''Concepts of Taxation'', Dryden Press: Fort Worth, TX The term ''progre ...
, in which the average tax rate increases as the amount subject to taxation rises. In between is a flat or proportional tax, where the tax rate is fixed as the amount subject to taxation increases.


Examples

*
Poll tax A poll tax, also known as head tax or capitation, is a tax levied as a fixed sum on every liable individual (typically every adult), without reference to income or resources. Head taxes were important sources of revenue for many governments fr ...
es * Lump-sum tax * A tax with a cap, above which no taxes are paid, such as the American Social Security Tax, which does not apply to wages over an annual limit. * So-called "
sin tax A sin tax is an excise tax specifically levied on certain goods deemed harmful to society and individuals, such as alcohol (drug), alcohol, tobacco tax, tobacco, drugs, candy, candies, soft drinks, fast foods, coffee, sugar, gambling, and porno ...
es" (
pigovian tax A Pigouvian tax (also spelled Pigovian tax) is a tax on any market (economics), market activity that generates negative Externality, externalities (i.e., external costs incurred by the producer that are not included in the market price). The tax ...
es) have also been criticized for being regressive, as they are often consumed more (or at least at a greater proportion) by the lower classes. Such taxes are often imposed at a flat rate so they will make up a greater proportion of the final price of cheaper brands, compared to the higher-quality products generally consumed by the wealthy. For example, "people in the bottom income quintile spend a 78% larger share of their income on alcohol taxes than people in the top quintile." Tobacco in particular is highly regressive, with the bottom quintile of income paying an effective rate 583% higher than that of the top quintile. * An allowance reduction in an income tax system allows for an individual's personal allowance to be withdrawn, making a higher marginal tax for a limited band before returning to the underlying rate. In the UK, there is an effective 60% band at £100,000, which returns to 40% at £120,000. * Non-uniform excise taxation based on everyday essentials like food ( fat tax,
salt tax A salt tax refers to the direct taxation of salt Salt is a mineral composed primarily of sodium chloride (NaCl), a chemical compound belonging to the larger class of Salt (chemistry), salts; salt in the form of a natural crystallinity, c ...
), transport (
fuel tax A fuel tax (also known as a petrol, gasoline or gas tax, or as a fuel duty) is an excise tax imposed on the sale of fuel. In most countries the fuel tax is imposed on fuels which are intended for transportation. Fuels used to power agricultural v ...
, fare hikes for public transport, mobility pricing), energy (
carbon tax A carbon tax is a tax levied on the carbon emissions required to produce goods and services. Carbon taxes are intended to make visible the "hidden" Social cost of carbon, social costs of carbon emissions, which are otherwise felt only in indire ...
) and housing (
council tax Council Tax is a taxation, local taxation system used in England, Scotland and Wales. It is a Property tax, tax on domestic property, which was introduced in 1993 by the Local Government Finance Act 1992, replacing the short-lived Poll tax (Grea ...
,
window tax Window tax was a property tax based on the number of windows in a house. It was a significant social, cultural, and architectural force in England, France, and Ireland during the 18th and 19th centuries. To tax avoidance, avoid the tax, some hous ...
) is frequently regressive on income. The income elasticity of demand of food, for example, is usually less than 1 (inelastic) (''see Engel's law'') and therefore as a household's income rises, the tax collected on the food remains almost the same. Therefore, as a proportion of available expenditure, the relative tax burden falls more heavily on households with lower incomes. Some governments offer rebates to households with lower incomes, ostensibly in an effort to mitigate the regressive nature of these taxes. ** A related concept exists where production and importation of essential goods are strictly controlled, such as
milk Milk is a white liquid food produced by the mammary glands of mammals. It is the primary source of nutrition for young mammals (including breastfeeding, breastfed human infants) before they are able to digestion, digest solid food. Immune fact ...
,
eggs Humans and human ancestors have scavenged and eaten animal eggs for millions of years. Humans in Southeast Asia had domesticated chickens and harvested their eggs for food by 1,500 BCE. The most widely consumed eggs are those of fowl, especial ...
,
cheese Cheese is a dairy product produced in wide ranges of flavors, Mouthfeel, textures, and forms by coagulation (milk), coagulation of the milk protein casein. It comprises proteins and fat from milk, usually the milk of cows, Water buffalo, bu ...
and
poultry Poultry () are domestication, domesticated birds kept by humans for their egg (food) , eggs, their meat or their feathers. These birds are most typically members of the Superorder (biology), superorder Fowl, Galloanserae (fowl), especially the ...
under Canada's supply management system, the result being that the products will sell for a higher price than they would under a free market system. The difference in price is often criticized for being a "regressive tax" even though such products are generally not taxed directly. *
Payroll tax Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their employees. By law, some payroll taxes are the responsibility of the employee and others fall on the em ...
es, such as FICA and Unemployment Insurance in the United States, and consumption taxes such as
value-added tax A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end ...
and
sales tax A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a govern ...
es are regressive in that they both raise prices of purchased goods. Lower-income earners save and invest less money, so pay a larger proportion of their income toward these taxes, directly for sales tax and as the price increase required to make revenue covering payrolls for payroll taxes. * Lotteries have been described as a disguised regressive tax.


Implementations

In 2005, the Swiss canton of
Obwalden Obwalden, also Obwald (german: Kanton Obwalden, rm, Chantun Sursilvania; french: Canton d'Obwald; it, Canton Obvaldo), is one of the 26 cantons forming the Swiss Confederation ). Swiss law does not designate a ''capital'' as such, but t ...
implemented a regressive taxation system. It was struck down by the
Federal Supreme Court of Switzerland The Federal Supreme Court of Switzerland (german: Bundesgericht, french: Tribunal fédéral, it, Tribunale federale, rm, ) is the supreme court of the Swiss Confederation and at the head of the Federal courts of Switzerland, Swiss judiciary ...
in 2007, because it ran counter to the
Swiss Federal Constitution The Federal Constitution of the Swiss Confederation (SR 10; german: Bundesverfassung der Schweizerischen Eidgenossenschaft (BV); french: Constitution fédérale de la Confédération suisse (Cst.); it, Costituzione federale della Confederaz ...
.


See also

* Lump-sum tax *
Progressive tax A progressive tax is a tax in which the tax rate increases as the taxable amount increases.Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), ''Concepts of Taxation'', Dryden Press: Fort Worth, TX The term ''progre ...
* Proportional tax * Tax incidence *
Laffer curve In economics, the Laffer curve illustrates a theoretical relationship between tax rate, rates of taxation and the resulting levels of the government's tax revenue. The Laffer curve assumes that no tax revenue is raised at the extreme tax rates o ...
* Suits index * Ghetto tax * Progressivity in United States income tax


Notes


External links

{{DEFAULTSORT:Regressive Tax Taxation and redistribution Tax incidence