regressive tax

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1. system of taxation in which tax rates decline as the tax base rises.
For example, a system that taxed values of $1,000 to $5,000 at 5%, $5,000 to $10,000 at 4% and so on would be regressive. A regressive tax is the opposite of a progressive tax.

2. tax system that results in a higher tax for the poor than for the rich, in terms of percentage of income. In this sense, a sales tax is regressive even though the same rate is applied to all sales, because people with lower incomes tend to spend most of their incomes on goods and services. Similarly, payroll taxes are regressive because they are borne largely by wage earners and not by higher income groups. Local property taxes also tend to be regressive because poorer people spend more of their incomes on housing costs, which are directly affected by property taxes.
See also flat tax.

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This entry contains information applicable to United States law only.

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.

See: taxation.

A tax that takes a higher percentage of low incomes than high ones. Sales taxes, especially on food, clothing, medicine, and other basic necessities are widely cited as examples of regressive taxes. (Compare progressive tax.)

A tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder.

Investopedia Says:
Some examples include gas tax and cigarette tax. For example, if a person has $10 of income and must pay $1 of tax on a package of cigarettes, this represents 10% of the person's income. However, if the person has $20 of income, this $1 tax only represents 5% of that person's income.

Sales taxes that apply to essentials are generally considered to be regressive as well because expenses for food, clothing and shelter tend to make up a higher percentage of a lower income consumer's overall budget. In this case, even though the tax may be uniform (such as 7% sales tax), lower income consumers are more affected by it because they are less able to afford it.

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For a list of words related to regressive tax, see:

• Types of Taxes - regressive tax: tax rates that tax lower incomes at higher rates than higher incomes; tax rates equal at all levels of income, effectively taxing lower incomes more heavily

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