• Money
    • Budget
    • Shop
    • Travel
    • Stories
  • Career
    • Advice
    • Entrepreneurship
    • Freelance
    • Small Business
  • Investing
    • General
    • IRA + 401K
    • Stocks + Bonds
    • Retirement Planning
    • Estate
  • The Basics
    • Student Loans
    • Credit Cards
    • Debt
    • Taxes
    • More
  1. Home
  2. The Basics
  3. Taxes
  4. The Pros & Cons of Regressive Taxation

The Pros & Cons of Regressive Taxation

September 18, 2011
By: Chris Joseph
  • Share
  • Share on Facebook

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.

Portrait of beautiful woman with wallet in the hands
A woman pulls out cash from her wallet to pay for her goods and the sales tax.
credit: boryanam/iStock/GettyImages

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.

Discouraging Consumption

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.

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.

Decreased Revenues

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.

Show Comments

Related Articles

How to Write Yourself an Abundance Check

How to Write Yourself an Abundance Check

Investing
General
By: Kathy Price
The Effects of Tax Cuts on Aggregate Demand & Aggregate Supply

The Effects of Tax Cuts on Aggregate Demand & Aggregate Supply

Investing
General
By: Hunkar Ozyasar

PARTNER CONTENT

4 Habits That Helped Me Stop Scraping By

4 Habits That Helped Me Stop Scraping By

You're Underpaying for All Your Alcohol

You're Underpaying for All Your Alcohol

Money
Budget
By: Esther Bergdahl
Objectives of Transfer Pricing

Objectives of Transfer Pricing

Investing
General
By: Hunkar Ozyasar
Pros & Cons of Low Interest Rates

Pros & Cons of Low Interest Rates

The Basics
Debt
By: Bonnie Conrad

Get Weekly Savings& Finance Tips.

  • Money
  • Career
  • Investing
  • The Basics
  • About
  • Contact Us
  • Terms
  • Privacy Policy
  • Copyright Policy
© 2018 Leaf Group Ltd. Leaf Group Media

Get Weekly Savings
& Finance Tips.

Money Made Easier.

Please enter a valid email.