Regressive Tax
A tax structure where lower-income earners pay a higher percentage of their income than higher-income earners.
What is Regressive Tax?
A regressive tax is one where the effective tax rate decreases as income increases, placing a proportionally greater burden on lower earners. While the nominal rate may be flat or per-unit, the share of income consumed by the tax falls as income rises. Sales taxes, excise taxes, and payroll taxes (due to caps on taxable wages) are common examples. For instance, a 6% state sales tax represents a much larger share of a low-income worker's budget than a high earner's. Regressive taxes are often criticized for exacerbating income inequality.
Example
Two workers each pay $2,000 in annual sales and excise taxes. Worker A earns $25,000 per year: $2,000 represents 8% of income. Worker B earns $250,000: $2,000 is only 0.8% of income. The identical dollar amount creates a tenfold difference in effective rate, illustrating the regressive nature of consumption taxes.