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Regressive Taxation

Any tax system, be it an income or consumption tax system features its relationship to the percentage of tax burden. A regressive taxation is whereby the effective tax rate decreases as the amount subject to taxation increases. It therefore is justifiable to say that the tax burden falls more heavily on citizens with low income. Therefore contrasting progressive taxation and proportional taxation whose principle is of equal sacrifice of both the rich and the poor.

Regressive taxation simply implies that the taxation imposes a greater tax burden, (based on resources), on the poor, thus creating a contrasting relationship between the tax rate and the capabilities of the tax payer to pay the tax as calculated by consumption, income or the assets the taxpayer possesses.

Regressive taxation is in light to the distribution effect on consumption or income in reference to the way the rate progresses from high to low, where the average tax rate surpasses the marginal tax rate. In other words, regressive taxation shifts the tax incidence disproportionately to the poor and tends to reduce the incidence of the people with high paying capabilities.

Tax is considered regressive when the activity of taxation is less likely to be carried out by the highly paid and more likely to be carried out by the lowly paid individuals. This is to say that it depends on the tendency of the tax payers to engage in the tax action relative to their income. Regressive taxation for that reason is used in reference to fixed taxes where every individual has to be taxed an equal amount of money.

The main determinants of regressive taxation are the income substitution effect and the income elasticity of the goods subject to taxation. This is because of the fact that it is very possible for a tax to be termed as regressive but result in progressive effects or/and vice versa. A very good example of this is in lotteries. The rich individuals in the society obviously possess more debt instruments, while the poor tend to gamble more to become richer, a regressive tax may have progressive effects and a progressive tax in this example may result in regressive effects respectively.

Illustrations of regressive taxation

A very simple and common example is sales tax imposed on grocery products. This is usually considered regressive taxation as both the poor and the rich must pay the same amount. This also applies to such other essentials like transport, housing and clothing. Since the income elasticity of the demand for these essentials is less, they take up a higher percentage of a lowly paid individual’s budget.

Another applicable example is a poll tax which is normally fixed and must be paid by every individual, thus, the payment is in lower proportion to highly paid individuals. Taxes on alcohol and tobacco, commonly known as sin taxes are also an example of regressive taxation. This is because both the lowly paid and highly paid individuals consume the products, where the lowly paid persons tend to consume more, or at the same level as the higher classes.

Taxation on property is debatably regressive tax. On one hand, the income elasticity of demand of housing is normally less, on the other hand, property taxes contribute highly to the cost of renting or owning housing, and obviously, the property taxes take up a higher percentage of an individual’s budget who has a low income than it does for an individual’s budget with a higher income.

By and large, most economists view regressive taxation as unfair taxation as the tax burden is hugely placed on low income earners.

Tags: Income, money, tax, Taxation

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