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top   »  government   »  tax policy   »  progressive vs regressive

Tax: Progressive vs Regressive

 , June 26, 2016 updated on January 15, 2023
A progressive tax becomes a higher rate of your income as your income rises. In other words, it taxes the wealthy at a higher rate than the poor.
A regressive tax is the opposite of a progressive tax and includes any tax that tends to be paid at a higher rate for low income earners.
Income taxes are normally progressive. Regressive taxes often fall into a category known as Pigovian tax that seeks to protect the environment, improve health or reduce social problems. For example, if there is a health epidemic due to over-consumption of sugar and sugar-like chemicals, a country may impose a tax on extremely sugary products in an attempt to reduce consumption. Such taxes are regressive because the lower your income, the higher the percentage you're likely to spend on items such as food and other categories that are targeted by Pigovian taxes.
Ecotaxes are a common type of Pigovian tax that are also typically regressive. For example, a tax on fossil fuels may have benefits for the environment but tends to target low income individuals at a higher rate. Wealthy individuals may spend a very small percentage of their income on energy.
A flat rate value added tax can also be regressive as a low income worker may immediately spend their paycheck thus incurring the tax. A wealthy individual may save a high percentage of their income, thus deferring value added taxes.
Regressive taxes may be accompanied with tax-back schemes that make them progressive. For example, if you charge a 10% value added tax and send every adult in the country a refund for $1000 each year, individuals who spend less than $10,000 a year will pay no tax. The refund will have little impact for wealth individuals but will help those who are close to a basic survival income. Alternatively, new taxes such as ecotaxes can be accompanied by reduction or elimination of income tax for those below a prescribed income.
Tax: Progressive vs Regressive
ProgressiveRegressive
DefinitionA tax that charges a higher rate as your annual income rises.A tax that tends to charge a higher rate as your annual income decreases.

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