A regressive tax is a tax that tends to amount to a greater percentage of total income for those with lower incomes more than those with higher incomes. In other words, regressive taxes disproportionately burden the poor or middle class. The opposite of regressive taxation is progressive taxation which is based on the taxpayer's ability to pay. There are many types of taxes that are considered regressive.
Taxes on Essentials
Taxes on essential goods and services that are required for living such as food and clothing are often considered regressive taxes. Everyone needs to eat and clothe themselves, regardless of how much money they make, and people with less income tend to spend a greater proportion of their incomes on basic essentials than those with high incomes. This means sales taxes on essentials amount to a greater percentage tax on those with lower income.
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According to the IRS, taxes on things like gasoline and motor fuels can also be considered regressive. These taxes are regressive because low earners are still paying the same percentage as higher earners.
Sin taxes are taxes on items that are thought to lead to undesirable social outcomes such as poor health, like alcohol and cigarettes. Both alcohol and cigarettes are heavily taxed, in part, to discourage people from using them. Across the world, governments have proposed the taxation of substances such as soda, sugar, meat and even milkshakes in an effort to promote healthier diets and combat obesity.
Sin taxes such as alcohol and cigarette taxes are assessed on consumption regardless of income. They are therefore considered to be a type of regressive taxation.
Social security is a tax on income earners that helps provide social protections such as giving money to retirees, those in poverty and disabled people. The social security tax can be considered a regressive tax because social security obligation is limited to a certain fixed amount of income.
Social Security tax is charged on the first $142,800 of income in 2021. This tax cap will rise to $147,000 in 2022. This means that individuals who earn more than that amount do not pay social security tax on income that exceeds the limit. This means those with very large incomes will pay an extremely low percentage of total income to social security.
Fixed Taxes and Fees
Excise taxes are taxes designed to fund public goods through fees that are often charged at fixed rates. Any type of tax that charges a single flat cost or fee to the taxpayer can be considered a regressive tax, since a flat cost will amount to a greater percentage of income for low-income earners than high-income earners.
The IRS says that things such as tolls on roads, parking fees, fishing and hunting licenses and entrance fees to museums, monuments and parks are examples of regressive fees. Legal fines, such as speeding tickets, are also regressive as the amount charged does not depend on income.