Regressive Tax With Examples
How Regressive Taxes Increase Your Costs
Taxes are regressive when they impose a harsher burden on the poor than on the rich. In poor families, a larger proportion of their income pays for shelter, food, and transportation. Any tax decreases their ability to afford these basics.
The wealthy, on the other hand, can afford the basics. Taxes decrease their ability to invest in stocks, add to retirement savings, or purchase luxury items. It may affect their standard of living but won't deprive them of essentials.
- Regressive taxes place more burden on low-income earners. Since they are flat taxes, they take a higher percentage of income on the poor than on high-income earners.
- Taxes on most consumer goods, sales, gas, and Social Security payroll are examples of regressive taxes.
- Pigouvian and sin taxes are specific types of regressive taxes.
Why Regressive Taxes Impose More on the Poor
The Consumer Expenditures Report found that the lowest-earning fifth of the population spent $26,019 in 2017. Of that, they spent $10,413 on housing, $4,070 on food, and $3,497 on transportation. They only spent $495 on retirement savings.
The highest-earning fifth spent $116,988 a year. Of that, they spent $35,234 on housing, $13,079 on food, and $18,190 on transportation. They spent $17,350 on retirement savings.
The following chart illustrates the typical spending statistics per 20% of the population.
Types of Regressive Taxes
A regressive tax takes a higher percentage of earnings from lower-income people than those with higher incomes. Most regressive taxes aren't income taxes. They take a larger proportion from low-income people because they have less money left over after the tax.
The Institute of Tax and Economic Policy found that the lowest-earning fifth paid 10% of their income in state taxes. That includes sales, property, and income tax. The highest-earning fifth paid around 7% of their income. For the lowest-earning group, most of what they paid was sales tax. For the highest-earning group, most was income tax.
Most consumption taxes are regressive. The only progressive consumption taxes are those on luxury items, such as fine jewelry, yachts, and private jets.
Sales taxes are applied as a percentage of the sales price. States apply them to most goods except for groceries, prescription drugs, and housing. Many states also levy them on services. They are regressive because they take a bigger chunk from low-income families. But the omission of taxes on food, shelter, and health costs makes them less regressive.
The Fair Tax
The Fair Tax is a proposed replacement of the income tax with a higher sales tax. It is meant to simplify federal tax collection. It would repeal the 16th Amendment and eliminate the Internal Revenue Service. It would impose a 30% retail sales tax. To make it less regressive, everyone would receive a monthly “prebate” equivalent to the tax on the cost of living at the poverty level.
A flat tax is an alternative income tax that applies the same rate to every income level. Technically, it's not a regressive tax because the rate is the same. But it does impose a greater burden on poor families. They must reduce spending on the basics to pay the tax. It would help them to increase exemptions and the standard deduction.
An excise tax is a flat tax imposed on each item sold. It is regressive because it takes a greater percentage of a poor person's income. It becomes more regressive if it is imposed on goods and services the poor are more likely to use. This is true for the so-called sin taxes that are levied on cigarettes,
alcohol, and gambling.
Cigarette taxes are the most regressive excise tax.
They are levied by federal, state, and local governments on each pack. The cigarette tax is regressive on two levels. First, the tax takes a larger percentage of income. Second, low-income people are more likely to smoke. At least 30% of those earning below the poverty line smoke cigarettes. That compares to slightly more than 15% who earn more than twice as much as the poverty line.
Alcohol taxes aren't as regressive. A 2015 Gallup Poll found that 27% of those earning less than $30,000 reported they drink more than they should. It's not much more than the 24% of those earning $75,000 or more who reported the same.
The gasoline tax is a mildly regressive excise tax. The federal gas tax is 18.4 cents per gallon, while the average state tax is 27.8 cents per gallon. It's regressive because the poor can least afford the tax. But they don't spend much more of their income on gasoline than the rich.
The gas tax is also a Pigouvian tax, with its own set of pros and cons. It covers the cost of road usage since most of the revenues go to highway maintenance.
Tariffs are excise taxes levied on imports. They are regressive because they raise the price of goods and services. The poor must pay these higher costs in the form of higher prices. The United States imposes tariffs on food, manufactured goods, chemicals, and clothing. It waives tariffs on imports from countries with which it has free trade agreements.
The value-added tax is a special type of excise tax. It's like a tariff in that it's levied on imports. The European Union and other countries use it, but the United States doesn't. Since it is a consumption tax, it is regressive.
A user fee is a government charge to use public facilities or services. States charge a fee to drive on toll roads. The National Park Service charges admission to its facilities. Some states charge prisoners fees for health care.
Cities charge admission to municipal golf courses and tennis facilities. Cities also charge fees for services, such as building permits, vehicle registration, inspection fees, and zoning hearings. This is a politically acceptable way to raise revenue without increasing tax rates. User fees are regressive because they take a larger percentage of low incomes.
Any other tax that confers an advantage to wealthy individuals is regressive.
That includes taxes that are capped at a high-income level. The Social Security payroll tax is such a regressive tax. Employees pay 6.2% of their income. Once they've earned a certain limit, they don't have to pay any payroll tax above the cut-off point. In 2020, the limit was $137,700.
The poll tax was a flat tax popular until the 19th century. Voters paid fixed fees when they registered to vote. By the Civil War, most states had abandoned them. Southern states reinstated the poll tax after the war to disenfranchise freed slaves and poor whites. In 1964, the 24th Amendment abolished the poll tax.
U.S. Bureau of Labor Statistics. “Consumer Expenditures in 2017," Accessed March 11, 2020.
Institute on Taxation and Economic Policy. "Who Pays? Sixth Edition," Accessed March 11, 2020.
Brookings. “The Pros and Cons of a Consumption Tax,” Accessed March 11, 2020.
CDC. MMWR Weekly. “Federal and State Cigarette Excise Taxes - United States, 1995-2009,” Accessed March 11, 2020.
Centers for Disease Control and Prevention. "Cigarette Smoking and Tobacco Use Among People of Low Socioeconomic Status," Accessed March 11, 2020.
Gallup. "Drinking Highest Among Educated, Upper-Income Americans," Accessed March 11, 2020.
National Bureau of Economic Research. “Is the Gasoline Tax Regressive?” Accessed March 11, 2020.
EIA. “How Much Tax Do We Pay on a Gallon of Gasoline and on a Gallon of Diesel Fuel?” Accessed March 11, 2020.
United States International Trade Commission. "Harmonized Tariff Schedule," Accessed March 11, 2020.
Governing the Future of States and Localities. “The Risks of Relying on User Fees,” Accessed March 11, 2020.
Social Security. “Contribution and Benefit Base,” Accessed March 11, 2020.
Smithsonian National Museum of American History. "Poll Taxes," Accessed March 11, 2020.