In general, systems of taxation are proportional, progressive or regressive in nature. A proportional system is one in which everyone pays the same percentage in taxes. In a progressive system, such as the United States federal tax code, the percentage of taxation increases as income levels increase. In a regressive system, all consumers pay the same dollar amount, regardless of income level. As with all forms of taxation, a regressive system offers certain advantages and disadvantages.
Freedom of Choice
When a regressive tax is based on consumption such as a sales tax, it can introduce an element of freedom of choice. Only those who choose to use a particular product or service must pay the tax, and those who consume more frequently pay more taxes than occasional users. People also have some measure of control of how much they pay in taxes. If they wish to lower what they pay in taxes, they can elect to cut back on or discontinue the use of an item.
A regressive tax may be used to discourage people to avoid the use of potentially harmful products. A so-called "sin tax" on products like tobacco, alcohol and pornographic materials may make it more difficult for users of these products to afford their purchase, especially those at the lower end of the economic scale who need every dollar just to get by. Governments and municipalities may implement these taxes on the assumption that there will still be enough consumption of the products to generate needed revenues.
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Harming the Poor
On the downside, a regressive tax system can be viewed as unfair because it places a greater burden on those at the lower end of the economic scale. An individual earning $20,000 a year pays the same dollar amount in taxes on a purchase as an individual earning $200,000 per year. The end result is that the lower a person's income, the greater the proportion of that income that must be paid in taxes.
Another potential disadvantage of regressive taxation is that needed tax revenues could decrease if consumption decreases. This may occur during difficult economic times when consumers cut back on spending out of necessity. An increase in an existing tax may also cause consumers to reconsider whether they really need the product or service. If the tax revenues are used to supply necessary public services, large segments of a population could suffer as a result of decreased revenues.