There are two main types of tax systems utilized by nations: regressive taxes and progressive taxes. Under a progressive tax system, high-earning citizens pay a larger share of the overall tax burden than low-earning citizens. Under a regressive tax system, taxes are assessed uniformly on all citizens regardless of their income.
Most nations, including the U.S., feature both types of tax systems. For example, our income tax system is progressive, but there are also a number of regressive taxes that are assessed at the federal, state and local levels.
Disproportionately More Difficult on Low Earners
Regressive tax is generally considered to be disproportionately more difficult on those who earn the least because it doesn’t take into account their income. Instead, the tax is applied uniformly to everyone in all situations, resulting in low earners paying a higher percentage of their total income in taxes than high earners.
For example, according to the Consumer Expenditures Report published by the Bureau of Labor Statistics, the bottom 20% of U.S. households from an income standpoint spent 15% of their household income on food and 35% on shelter and utilities in 2015. In comparison, the top 20% of U.S. households from an income standpoint spent just 11% of their household income on food and 33% on shelter and utilities that year.
Assessing the same amount of tax on both income groups makes it more difficult for lower-earning individuals and families to afford the basic essentials of living. As a result, low-earners also tend to save less money for retirement. According to the Consumer Expenditures Report, the bottom 20% of U.S. households saved just 2% of their income for retirement in 2015 while the top 20% of U.S. households saved 14% of their income for retirement that year.
Examples of Regressive Taxes
Income taxes in the U.S. are not regressive because the more money an individual or family earns, the higher their tax rate will be. Following are some common taxes that are regressive:
- Sales taxes — Sales taxes are charged by states and localities as a percentage of the sale price whenever most items are purchased (groceries and prescription drugs are the main exceptions). These taxes are regressive because they consume a larger percentage of low-income families’ total household income.
- “Sin” taxes — A form of sales tax, these are taxes levied on products considered to be harmful, such as alcohol, tobacco and gambling. They usually take up a larger percentage of the income of low earners than more wealthy families and individuals. For example, the bottom 20% of U.S. households from an income standpoint allocate 1.3% of spending to cigarettes while the top 20% of U.S. households allocate just 0.3% of their income to cigarettes.
- Property taxes — These are assessed on the purchase of real estate, such as a primary residence. While they are fundamentally regressive, property taxes generally aren’t considered to be purely regressive because low-income households tend to live in less-expensive homes than high-income households. Therefore, they usually end up spending a lower percentage of their income in these taxes.
- Gasoline taxes — The federal gasoline tax is 18.4 cents per gallon while the average state gasoline tax is 27.8 cents per gallon. The gas tax isn’t as regressive as cigarette taxes: The bottom 20% of U.S. households from an income standpoint allocate 4% of spending to gasoline while the top 20% of U.S. households allocate 3% of their spending to gasoline.
- Payroll taxes — All employees pay 6.2% of their income in Social Security payroll taxes until income reaches a certain level ($137,700 in 2020). Since the payroll tax rate is the same for everyone, payroll taxes are regressive because they hit low-income families and individuals harder than wealthier families and individuals.
The Drawbacks of Regressive Tax Systems
Regressive tax is generally considered to be less-advantageous than progressive tax because it places a proportionally higher tax burden on low-earning citizens. However, most nations use both types of tax systems, not just one, so it usually isn’t an all-or-nothing situation.