Regressive Tax With Examples

Why Regressive Taxes Are Unfair

Customers reacting to high gas prices
••• Costco members fill up on gas at the wholesale company's gas pumps. Photo by Orjan F. Ellingvag/Dagens Naringsliv/Corbis via Getty Images

Taxes are regressive when they impose a harsher burden on the poor than 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.

The Consumer Expenditures Report found that the lowest-earning fifth of the population spent $24,470 in 2015. Of that, they spent 15 percent on food, 35 percent on shelter and utilities, and 2 percent on retirement savings. The highest-earning fifth spent $110,508. Of that, they spent 11 percent on food, 33 percent on shelter and utilities, and 14 percent on retirement savings. 

Examples

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.

For that reason, 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 Institute of Tax and Economic Policy found that the lowest-earning fifth paid 10 percent of their income in state taxes. That includes sales, property, and income tax. The highest-earning fifth paid around 7 percent 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.

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 percent 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.

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. A 2015 Gallup Poll found that about 30 percent of those earning $24,000 or less smoked. Only 13 percent of those making more than $90,000 did. The lowest-earning fifth allocated 1.3 percent of their spending on cigarettes, compared to 0.3 percent for the highest-earning fifth. 

Alcohol taxes aren't as regressive. A 2015 Gallup Poll found that 27 percent of those earning less than $30,000 reported they drink more than they should. It's not much more than the 24 percent of those earning $75,000 or more who reported the same. Only 18 percent of those in the low-income group said they had a drink within the last 24 hours, compared to 47 percent in the high-income group. The Consumer Expenditures Report found that the lowest-earning group spent 0.8 percent of their income on alcohol.

The highest-earning group spent 1.1 percent.

The gasoline tax is an excise tax. It is mildly regressive. 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 lowest-earning fifth of the population allocates 4 percent of their spending to gasoline. That compares to 3 percent for the highest-earning fifth, according to the Consumer Expenditures Survey. 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.

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.

A tax is regressive if it confers an advantage to wealthy individuals. 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 percent 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 2018, the limit is $128,400. 

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 basics to pay the tax. It would help them to increase exemptions and the standard deduction.

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.