Crawford School of Public Policy

TTPI
Tax and Transfer Policy Institute

What are progressive and regressive taxes?

TTPI – Policy Brief 3/2016

February 2016

Peter Varela
Research Fellow, Tax and Transfer Policy Institute,
Crawford School of Public Policy, Australian National University

Tax and Transfer Policy Institute

Crawford School of Public Policy
College of Asia and the Pacific
+61 2 6125 9318
tax.policy@anu.edu.au

The Australian National University

Canberra ACT 0200 Australia
www.anu.edu.au

CRICOS Provider No. 00120C

THE AUSTRALIAN NATIONAL UNIVERSITY

Brief: Progressive and Regressive Taxes
Taxes have a wide range of rates, A regressive tax is the opposite,
thresholds and burdens for different where the average tax rate, or amount
kinds of taxpayers. In general, we of tax paid as a percentage of income,
describe a tax decreases as income increases. An
as progressive or regressive by example of a regressive tax is a head
comparing the tax paid by an individual tax, or lump sum tax, which requires
with the income of that individual. each taxpayer to pay an identical
amount of tax. While a head tax is
A progressive tax is a tax where the equal in the sense that each taxpayer
average tax rate, or the total amount of pays exactly the same amount, it is a
tax paid as a percentage of income, regressive tax because the amount of
increases as the taxpayer’s income tax paid as a percentage of income
increases. A tax may be progressive if decreases as income increases.
people with higher incomes pay a
higher tax rate (e.g. the personal A proportional tax lies between a
income tax). Alternatively, taxes can progressive and a regressive tax, and
be progressive if the tax is levied on an collects a constant percentage of
action or purchase that is more income in tax for all taxpayers.
common amongst wealthier people
(e.g. the luxury car tax, or an
inheritance tax).

Figure 1: Progressive, proportional and regressive taxes

Source: TTPI, Stocktake Report, Chart 1.2

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The Australian income tax is a progressive tax

The most common example of a of each dollar earned in tax. This is

progressive tax is the personal income shown in the chart below, which
tax. As an individual’s taxable income displays the marginal and average tax
increases, they enter higher tax rates for the Australian income tax in
brackets, and pay a higher percentage 2014-15.

Figure 2: Marginal and average tax rates

Note: These are the statutory marginal tax rates excluding the phase out of the
Medicare Levy and low income tax offset that cause the tax schedule to become
regressive over some ranges.

The GST and other Australian taxes designed in a progressive way, so that
a greater burden applies for offenders
While the income tax is progressive, with higher incomes.
many of Australia’s other taxes are
regressive. So-called “sin taxes”, such The GST is an interesting and
as taxes on gambling, alcohol and important case. When the GST is
tobacco tend to be regressive because examined as a proportion of income,
they disproportionately affect those on the GST is found to be a regressive
low incomes. Many government tax, even though the GST is applied at
charges and fines such as motor a constant rate of 10 per cent. This is
vehicle registration, are highly because people with higher incomes
regressive. A recent report suggests tend to spend less (and save more) of
that traffic fines and penalties could be their income than people with lower

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incomes, which results in less GST inheritances), or as a measure of
being paid as a percentage of the ability to pay in its own right. As shown
income of higher income earners. in Figure 3, the GST is close to a
proportional tax when compared to an
However, progressivity can also be expenditure benchmark. This is also
measured against household shown in a 2014 OECD study on
expenditure rather than income. This distributional effects of consumption
could be justified as a proxy for lifetime taxes.
income (ignoring bequests or

Figure 3: The distributional incidence of the GST

Source: 2009 Household Expenditure Survey: Authors calculation based on the ABS
Fiscal Incidence Study. Note: This figure is based on the existing GST, rather than
an ideal broad based GST with no exemptions.

Overall, the Australian tax-transfer individuals or households, combined

system is progressive with the payment of cash transfers and
withdrawal of benefits over time.
Progressivity can be measured across
the whole tax and transfer (welfare) The figure below uses data from the
system. Such an overall measure Australian Bureau of Statistics and
takes into account the effects of all includes all taxes (except the
taxes in the system on different corporate income tax). It shows that
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the Australian tax system is only very tax. However, when combined with
slightly progressive; those in the transfer payments, the overall tax and
lowest income quintile pay around 22 transfer system is highly progressive
per cent of their income in tax, while (represented by the black line on the
those in the highest quintile pay chart).
around 27 per cent of their income in

Figure 4: The incidence of the Australian Tax and Transfer System (per cent of
income)

Source: Government benefits, taxes and household income. ABS Cat. No 6537.0

This chart also provides an important of the transfer system (discussed

insight into the nature of redistribution further on p. 35 of this Productivity
using the tax system. While the Commission report).
income tax is more progressive than
the rest of the tax system (the red Different measures of progressivity
versus the green areas), the transfer
There isn’t a single measure of
system is much more progressive than
progressivity. In fact, there are a
the income tax. As a result, a key
variety of options that need to be
determinant of the progressivity of a
considered in order to estimate how
tax/transfer system is the absolute size
progressive or regressive a tax is.
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Economic incidence of a tax to consider progressivity over a longer
time period (in Australia such long-
First, ideally progressivity is
term data is not available, and
determined based on the economic
so estimates of lifetime progressivity
incidence (as opposed to the legal
must be modelled, such as in chapter
incidence) of a tax. Those who are
6 of this Productivity Commission
legally obliged to pay a tax will often
report).
try to pass that tax on to another party.
For instance, taxes placed on Unit for comparison
producers, or on vendors, may be
passed on to customers, either in part Third, it is necessary to decide the
or in full, through increased prices. In appropriate unit for comparison.
practice, it may be difficult to Progressivity is generally estimated at
determine exactly who bears the either the household level or the
economic burden of a tax, as this individual level. This choice has
depends on how wages, prices and important implications when looking at
behavior changes in our economy. the impact of the tax and transfer
system, as the tax system is largely
As a result, simplifying rules of thumb based on the individual, while the
are often used. For example, it is transfer system is largely based on the
usually assumed that all GST is borne household.
by the final consumer, and all income
and payroll tax on wages, paid or To see why this might be important,
withheld by the employer, is borne by consider the example of an increase in
the employee. (On the potential the minimum wage. By definition, this
problems with this assumption about will be a progressive policy change
payroll tax, see Mathias Sinning’s when using individuals as the base
article on the blog). because people earning minimum
wage are at the low end of the income
Benchmark of income or distribution. However, if those low
expenditure
income individuals are earning income
Second, it is necessary to decide in a high income household that has
which definition of income (or other sources of income (for instance if
expenditure) is to be used as the they are children living with their
benchmark for defining progressivity. parents), then the same policy may be
This is usually annual disposable regressive when measured using the
income after all taxes and transfers are household as a base. This issue was
taken into account. However, if the considered by Andrew Leigh in 2007,
data is available it is may be possible who found that ‘given that the typical

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minimum wage worker lives in a  Retired people or students may
middle-income household, it appears have very little income on an
unlikely that raising the minimum wage annual basis but may have
will significantly lower family income considerable wealth, expected
inequality’. future earnings or future wealth
and therefore may be
Where an analysis focuses on data at considered reasonably well off
the household level, it is common to overall.
make an adjustment for the number of  Families in which individuals –
people residing in a household. The especially women - are taking
reasoning is that a family of six living time out of the labour force to
on $100,000 a year is less ‘well off’ care for young children,
than a family of two with the same providing valuable “imputed
income. An example of this is the income” in the household but
Australian Bureau of Statistics not earning income measured in
measure of Equivalised Household the data.
Income, which is calculated as follows:  Unemployed people, particularly
where people are unemployed
Taking the first adult in the household
for short periods of time, may
as having a weight of 1 point, each
report low income in one
additional person who is 15 years or
particular year, but over a
older is allocated 0.5 points, and each
longer time period may be
child under the age of 15 is allocated
reasonably well off.
0.3 points. Equivalised household
income is derived by dividing total Progressivity and inequality
household income by a factor equal to
the sum of the equivalence points Progressivity of taxes and transfers
allocated to the household members. can also be estimated by comparing
the impact of a tax with more general
In many cases, the choice of individual measures or indexes of income
or household as the base for inequality. An example is the Gini
comparison and the choice of income coefficient which measures how
definition will only have a minor effect unequal the distribution of income is
on the results. However, particular among individuals and households. It
care needs to be taken when is possible to estimate the Gini
analyzing progressivity for individuals coefficient before taxes and transfers,
or households in some particular and compare it with the Gini coefficient
circumstances. after taxes and transfers. This also
gives us information about

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progressivity of the tax and transfer it is possible to show the incidence of
system. This summarises the taxes and transfers over the age
progressivity of a tax system into a distribution of a population. The
single number, and as a result it can following chart shows that Australia’s
be used to make comparisons government spending is highly
between tax systems over time or concentrated towards older Australians
across countries. (and suggests why population ageing
will put pressure on the federal
Incidence of taxes by age budget).

Using the same framework used to

estimate progressivity and regressivity,

Figure 5: Australian Government spending by age group ($‘000 per person,

2011-12)

Source: Chart 5.1, An Ageing Australia, Preparing for the Future. Productivity
Commission.

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Progressivity or regressivity of tax the difficulties in this context can be
concessions or ‘tax expenditures’ found here and here).

It is possible to estimate the Putting aside difficulties in exact

progressivity or distributional impact of measurement, it is clear that a number
tax concessions in the system, such as of Australia’s tax expenditures are
exemptions or low tax rates, as well as regressive. For example, Figure 7
the progressivity of the overall tax rate below shows the proportion of
structure. Such analyses follow the superannuation tax concession
same basic structure as the examples received by people in different parts of
given above. However, to estimate the income distribution, and shows that
whether or not a tax concession is they are highly skewed towards high
progressive or regressive, it is income individuals. In fact, individuals
necessary to accurately identify the in the lowest income decile are
incidence of the tax expenditure. This actually worse off as a result of our tax
is difficult for a number of Australia’s rules for superannuation.
large tax expenditures (a discussion of
Figure 6: Distribution of superannuation tax concessions is regressive

Source: A Stocktake of the tax system and directions for reform, Chart 4.12, the Tax
and Transfer Policy Institute.

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Further Research

How should progressivity be measured? By the Tax Policy Centre

The Distributional Effects of Consumption Taxes in OECD Countries

Tax and Transfer Incidence in Australia, by the Productivity Commission

Who Pays? A report on the progressivity of taxation in the 50 US States by the

Institute on Taxation and Economic Policy

Measurement of Progressivity, from the Treasury document: International

Comparison of Australia’s Taxes

Tackling income inequality - The role of taxes and transfers. From the OECD Journal
Economic Studies

What nation has the most progressive tax system, by Greg Mankiw

ABS Household Expenditure Survey

The Distributional Impact of State Taxes for South Australian Households, by Ben
Phillips

Analysis of the 2015-16 Federal Budget, By Ben Phillips