A regressive tax is one in which the tax rate decreases as the amount which is subject to the tax increases. In real world terms a regressive tax puts the greater burden on the poor rather than on the rich. This is because the poor pay proportionally more (as a percentage) of their income under a regressive tax scheme.
This type of tax scheme can be applied to a whole tax system or to individual taxes. Any regressive tax will reduce the tax burden of those who have higher income and net worth while shifting the burden disproportionately to those with limited income and resources. The opposite of this type of tax is a progressive tax where the tax rate increases as the amount being taxed increases. The middle ground would be a proportional tax (also called a flat tax), where the tax rate is fixed in regards to the amount being taxed.
Counter intuitively, a fixed tax rate is almost always regressive in nature rather than being proportional. The level of regressivness depends on the likelihood of each type of tax payer to engage in the activity, service or item being taxed. So, if the thing being taxed is more likely to be purchased by the poor then the tax is a regressive tax.
Some examples of regressive taxes include:
- The Obamacare tax penalty that the individual mandate imposes for those who choose not to purchase health insurance when the Affordable Care Act goes into effect, constitutes one of the most regressive taxes in the United States.”
- Taxes which are capped at a certain level. The US payroll tax is like this
- A value added tax or sales tax on necessary items such as food and clothing
- Sin taxes are often deemed regressive as studies have shown that the poor are more likely to consume alcohol and tabacco than the rich