Regressive tax
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A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.[2][3][4][5][6] "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the marginal tax rate.[7][8] 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.
It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Regressive taxes tend to reduce the tax incidence of people with higher ability to pay, as they shift the incidence disproportionately to those with lower ability to pay. The opposite of a regressive tax is a progressive tax, in which the average tax rate increases as the amount subject to taxation increases.[9][10][11][12] In between is a flat or proportional tax, where the tax rate is fixed as the amount subject to taxation increases.
The term is frequently applied in reference to fixed taxes, in which every person has to pay the same amount of money. The regressivity of a particular tax often depends on the propensity of the taxpayers 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, the tax may be considered regressive. To determine whether a tax is regressive, the income elasticity of the good being taxed as well as the income substitution effect must be considered.
Common examples
- Taxation based on everyday essentials like food (e.g. sales tax, salt tax), clothing (value added tax), transport (fuel tax), energy (carbon tax) and housing (council tax, window tax) are frequently regressive. 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, even significantly, the tax collected remains almost the same. So as a proportion of available expenditure the tax burden falls far more heavily on households with lower incomes.
- A tax with a cap, above which no taxes are paid. The United States payroll tax is an example of this.
- A poll tax is a fixed tax for each person. Since each person pays the same amount of money, it is a lower proportion for people with higher incomes.
- Television licences that are implemented in many countries, especially in Europe, are considered regressive taxes and in most[quantify] cases consist of a flat annual payment for the use of a television.
- The so-called sin taxes are also criticized for being regressive, as it is assumed that they are often consumed more (or at least at a greater proportion) by the lower classes. 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."[13] Tobacco in particular is highly regressive, with the bottom quintile of income paying an effective rate 583% higher than that of the top quintile.[13]
- An allowance reduction[14] 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 that returns to 40% at £113,000.[15]
United States
 | This article possibly contains original research. (October 2011) |
According to Congressional Budget Office estimates,[16] the federal tax system is a progressive tax system for earners all but the richest 1% of Americans. According to the study, the lowest earning 20% of Americans (24.1 million households earning an average of $15,900 in 2005) paid an effective federal tax rate of 3.9%, when taking into account income tax, social insurance tax, and excise tax. The highest earning 5% (5.8 million households earning an average of $520,200 in 2005) paid an effective federal tax rate of 21.5%. However, the highest earning 1% of Americans (1.1 million households earning an average of $1,558,500 in 2005) paid an "effective" federal tax rate of 21.3%.
Investor and multi-billionaire Warren Buffett has criticized the US tax code as highly regressive, citing himself as anecdotal evidence: Buffett stated that with an income of over $46 million, he pays a tax rate of 17.7%, whereas his receptionist pays a tax rate of 30%.[17]
While Buffett's critique focuses on significantly lower tax rates applied to certain forms of investment income (including capital gains), such regressive elements of the overall tax code should be considered in conjunction with other progressive factors, considering that tax codes have many interdependent variables.[citation needed]
The marriage penalty, particularly on those engaged in Shared Earning/Shared Parenting Marriage, creates a regressive tax system in the United States, so much so that economist Justin Wolfers has said that there is strong disincentive to have children within marriage or to marry at all.[18] The National Bureau of Economic Research has also reported a study showing "that two earner couples--the horses that pull our economic plow--pay for the second job with taxes that are far beyond the well known marriage penalty."[19]
The issue includes not only regressive tax, but also progressive benefits, where two-earner couples and single people are subsidizing one-earner/one-nonearner parent couples in a number of ways. For example, in Social security and Medicare, two-earner couples pay for their own benefits through employment taxes, while one-earner couples receive an extra, unfunded benefit of 50% or more in Social Security (a total of 150% or more) and 100% or more in Medicare (a total of 200% or more).
See also
Notes
- ^ "Who Pays Taxes in America?" (PDF). Citizens for Tax Justice. 12 April 2012.
- ^ Webster (3): decreasing in rate as the base increases (a regressive tax)
- ^ American Heritage (3). Decreasing proportionately as the amount taxed increases: a regressive tax.
- ^ Dictionary.com (3).(of tax) decreasing proportionately with an increase in the tax base.
- ^ Britannica Concise Encyclopedia: Tax levied at a rate that decreases as its base increases.
- ^ Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), Concepts of Taxation, Dryden Press: Fort Worth, TX
- ^ Hyman, David M. (1990) Public Finance: A Contemporary Application of Theory to Policy, 3rd, Dryden Press: Chicago, IL
- ^ James, Simon (1998) A Dictionary of Taxation, Edgar Elgar Publishing Limited: Northampton, MA
- ^ Webster (4b): increasing in rate as the base increases (a progressive tax)
- ^ American Heritage (6). Increasing in rate as the taxable amount increases.
- ^ Britannica Concise Encyclopedia: Tax levied at a rate that increases as the quantity subject to taxation increases.
- ^ Princeton University WordNet: (n) progressive tax (any tax with a rate that increases as the amount subject to taxation increases)
- ^ a b Barro, Josh (March 25, 2010). "Alcohol Taxes are Strongly Regressive". National Review Online.
- ^ http://www.hmrc.gov.uk/rates/it.htm
- ^ Tony Wickenden (November 13, 2009). "The 60% tax trap". Money Marketing.
- ^ Historical Effective Federal Tax Rates: 1979 to 2005 (PDF), Congressional Budget Office, December 2007
- ^ Tomoeh Murakami Tse (June 27, 2007). "Buffett Slams Tax System Disparities". The Washington Post. p. D03.
- ^ "Lovenomics: Forget Formulas, Have Children". New York Times. February 13, 2012.
- ^ "The Real Tax Burden of Two Earner Couples". Retrieved 21 February 2012.
External links
- Historic Struggles - A chapter from the 2004 book, Greed and Good ISBN 1-891843-25-7, that traces the history of efforts to create and maintain a progressive tax structure in the United States.