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Understanding Regressive Tax

Understanding Regressive Tax

Understanding Regressive Tax

As taxes play a critical role in supporting government services, it is essential for individuals to understand how they work. There are various types of taxes, and they can take different forms to ensure government revenues. Regressive taxes, in particular, seem to be a subject of frequent debate. The purpose of this article is to define, explain, and analyze the nature of regressive taxes. It will cover examples of regressive taxes, their advantages, and drawbacks, as well as recent updates on the topic using government resources.

Defining Regressive Tax

Regressive taxes are a type of tax system in which a person with lower income pays a higher percentage of their income in tax than a person with a higher income. In other words, as the income level goes down, the tax burden becomes progressively heavier. Regressive taxes take different forms, such as sales tax, excise taxes, and property taxes. The principle behind regressive taxes is that everyone pays the same tax rate, regardless of their income level. However, this principle seems unjust as low-income earners have less disposable income to manage the taxes than high-income earners.

Examples of Regressive Tax

Sales Tax

One of the most common examples of a regressive tax is sales tax. States and local governments levy sales taxes on most goods and some services. The tax rate varies from state to state, ranging from 2.9% to 7.5% of the total purchase price. However, increasing sales tax can affect low-income earners disproportionately, as they spend more of their income on products subject to sales tax. This is because people with low income tend to spend a larger percentage of their money as opposed to saving or investing it.

Excise Tax

Another common example of a regressive tax is an excise tax. Excise taxes are charges placed on specific goods or services, which are typically considered harmful to society. Examples of products subject to excise taxes include tobacco, gasoline, and alcohol. Excise taxes are considered regressive taxes because a greater proportion of income is spent on such goods by low-income earners, who may be more reliant on tobacco, gasoline, or alcohol than high-income earners.

Property Taxes

Property taxes are also a regressive tax. Property taxes are levies on properties, including land, buildings, and other structures. Property taxes usually vary per state, ranging from 0.1% to 2.5%. Property taxes are viewed as a regressive tax because they affect homeowners with lower incomes in several ways. Firstly, property taxes do not depend on an individual’s income. Secondly, people with lower salaries tend to live in low-income neighborhoods, where property taxes are relatively high for the area they live. As a result, low-income earners living in such areas may experience a greater burden than high-income earners.

Advantages of Regressive Tax

One of the advantages of regressive tax is that it can generate revenue for the government faster. Regressive tax has a broad base, and its application is simple, which means governments can collect money more efficiently. This makes regressive taxes an attractive option for governments who want to finance their spending quickly. It is also a simple and efficient way for governments to increase revenue because it does not require a complex administration.

Another advantage of regressive tax is that it can incentivize savings and investment. If tax rates are lower for high-income earners, this could create more incentives for people to work harder and invest more money, as they would be allowed to keep a larger portion of their income. By maintaining high-income earners, the government would also stimulate economic growth, job creation, and investment opportunities.

Drawbacks of Regressive Tax

A significant disadvantage of regressive tax is that it can be quite harsh on people with low incomes. Regressive taxes can result in low-income earners paying more taxes than high-income earners, which can lead to widespread economic inequity between the rich and the poor. Unfair taxes may not only cause economic hardship but also create social and political unrest.

Another disadvantage of regressive tax is that it may not encourage economic growth. This is because low-income earners typically have a higher marginal propensity to consume than high-income earners. In other words, low-wage earners are more likely to spend their money than those with a higher income. This means that seeing an increase in the sales tax rate, for instance, may reduce overall consumer spending, leading to an overall reduction in economic activity.

Recent Updates on Regressive Tax

The COVID-19 pandemic has brought global economic challenges, and the US has been hit significantly hard. As a result, several states and localities have looked to regressive taxes as an option to raise revenue in the wake of the pandemic. For example, in New York City, Mayor Bill de Blasio proposed a temporary “”health and equity”” levy of 1.5% on individuals making more than $5 million a year (The Economist, 2021). While this proposal seeks to reduce inequality, its structure has been criticized because of its exclusion of essential workers, healthcare staff, and small business owners.

This pandemic has forced governments to rethink their tax policies and increases in regressive taxes such as sales tax and excise tax could further burden low-income earners. However, it is still too early to determine how the government’s tax policies will be changed as the recovery from the pandemic continues.


In conclusion, regressive taxes are a form of taxation in which the tax burden falls heavier on low-income earners. Examples of regressive taxes include sales tax, excise tax, and property tax. Regressive taxes have advantages, such as easing the burden of tax administration and encouraging saving and investments, but they also have significant drawbacks, specifically in generating economic inequality. The response from governments to the COVID-19 pandemic has triggered a state of uncertainty causing renewed focus on regressive tax policies in the US. While regressive taxes can generate revenue for the government, policymakers should strike an appropriate balance to avoid worsening income inequality.

The regressive tax is the opposite of the progressive tax. The regressive tax is an income tax system based on the economic classification of the rich, middle, and working socio-economic classes. The regressive tax classes use similar criteria to deciding who falls into whatever category based on gross income of an individual or married couple. Since the 1980s, the regressive system of local income taxation has increased in usage. This trend is primarily based on the premises of Reaganomics. Reaganomics assumes that the private sector should be the engine of wealth and therefore, the tax burden should be decreased on the wealthiest members of society. The wealthiest members of society are assumed to be those who run small or large business with an inherent desire to expand their enterprise with desperately needed capital to expand their employment. The regressive tax is widely believed to be an engine of job creation in an economy.

The regressive tax in local taxation is a response to the economic slumps of the 1970s. The 1970s marked the time in which the American economy transitioned from a primarily industrial economy to an economy focused on the service sector. During the 1970s, the economy was characterized with stagnant job growth combined with monetary inflation- this trend would create the economic buzzword of the day: stagflation. Some economists argue that stagflation was caused by a lack of liquid capital in the market combined with a growing
welfare state that typified the Johnson administration’s “new society” programs. The other side of the argument argues that stagflation was not the government’s fault and stagflation was caused by the economic disruption of the fuel crisis that resulted from OPEC’s response to Israel’s victory in the 1973 Yom Kippur war and the West’s tacit support for the victors.

With international events, federal government policies, and economic polemics aside, by the 1980s, it was clear that public adored the idea of the regressive tax essential to the economic paradigm of Reaganomics. Proponents of the regressive tax touted the rich’s ability to expand the economy during the subsequent boom years of the 1980s. Local taxation reflected national income tax policies, in the meantime, the wealth of the rich expanded and this wealth created a flood of credit by which the middle class could benefit with bank loans. The regressive tax was considered the primary explanation of the rapid expansion of America’s gross domestic product as the end of the Cold War. Some go as far as to argue that the regressive tax was why America “won”
the Cold War.

The boom years of the 1990s were arguably the triumph of the regressive tax when more state and local governments mirrored the tax policies of federal government. States that kept their income taxes progressive had slower economic growth than the states who adopted regressive taxes. The progressive tax was
considered the policy that resulted in economic stagflation and urban decay that embodied the housing projects of New York and Los Angeles, both of these states kept their income taxes relatively progressive. The regressive tax is the quintessence of the neo-liberal economic theory the Chicago school of economics endorsed. Regressive taxes freed up allowed the Federal Reserve bank to slash interest rates to create the credit necessary to expand the housing market in many states. State governments were pleased with the regressive tax because the new home construction meant more revenue from property taxes. The regressive tax also created the   optimal conditions for Wall Street to financially innovate and give home-buyers incentive to invest in the real estate buyer’s market that characterized the last quarter century.

Unfortunately, the regressive tax did nothing to slow down inflation. The cost of living in all American states increased during this period, thereby decreasing the purchasing power of the dollar. Regressive taxes decreased the availability of liquid capital for the lower echelons of socio-economic totem pole, causing savings to plummet. This forced lower and middle class Americans had lower local taxation but more private debt. Some economists argue that employment increased during this period as a result of the expansion of the
telecommunications industry and has little to do with reductions in federal and local taxation for the rich.