CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 78.1% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
US English

What does regressive tax mean?

the guy is sitting and pointing to some kind of diagram

The regressive tax definition explains it as a tax that is uniformly imposed regardless of the income. Regressive taxes are often flat. The amount of taxes paid by the taxpayers can decrease as their income increases. 

Low-income persons suffer a disproportionate percentage of the tax burden relative to middle- and high-income people because the same tax rate applies regardless of income. 

With a regressive tax system, the same dollar amount paid by lower-income people accounts for a much larger percentage of total revenue earned. For higher-income people, however, the same tax rate may result in a relatively tiny share.

How does a regressive taxation system work?

What is regressive tax in economics? While applying the same tax rate to all taxpayers regardless of their financial condition is fair in most circumstances, it could be unjust in others. That is why, when it comes to income taxes, a regressive tax is rarely used. 

Most countries have a progressive income tax system, which means that high-income people pay a greater tax rate than low-income earners. But other industries or activities – such as sales taxes, payroll taxes and property taxes – are subject to regressive taxes.

Types of regressive taxes are as follow:

  1. Sales tax

Sales taxes are applied to goods and services sold to consumers. The tax rates are flat and levied uniformly to all taxpayers.

  1. Sin tax 

Sin taxes are imposed on goods that are deemed to be damaging to society. Tobacco, alcohol and high-sugar products are among these items. Because of the disparities in consumption patterns between low- and high-income groups in a society, sin taxes are highly regressive. 

According to studies, those with lower incomes are more likely to consume dangerous products like cigarettes and liquor than those with higher incomes.

  1. Property tax 

Property taxes are deemed regressive since they are levied on the basis of the property’s worth rather than the owner’s income. As a result, in theory, if two people live in the same tax jurisdiction and own properties with the same value, they will pay the same amount of tax. 

In reality, lower-income earners live in less-expensive homes, whereas higher-income earners typically purchase more expensive residences.

  1. User fees

User fees – such as admission fees to the government-funded recreation park, toll-road fees and driver’s licence costs – are another form of regressive tax. This is because all taxpayers pay the same amount.

For example, a government-funded museum charges $10 admission fees, which apply to all visitors regardless of their financial condition. 

  1. Flat tax

A flat tax is a tax in which the government levies the same percentage on all income, regardless of wages. There are no deductions or credits available under the flat tax system.

How is regressive tax calculated? 

The purchase of goods could be a simple regressive tax example. For example, two ladies, woman A and woman B, each spent $100 on new clothes. The rate of sales tax is 10%. That meant they each had to pay $10 in sales tax. On the other hand, Woman A gets $2,000 per month, while woman B makes $3,000 per month.

Despite paying the same amount of tax, woman A’s tax rate on her income was $10/$2,000 = 0.5%, while woman B had a tax proportion of $10/$3,000 = 0.33%. The sales tax is regressive in this scenario.

Latest video

Latest Articles

View all articles

Still looking for a broker you can trust?

Join the 610,000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading