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A regressive tax is a tax which takes a larger percentage of income from people whose income is low. It places proportionately more of a burden on those with lower incomes. Regressive taxes, as opposed to progressive taxes, are more burdensome on lower-income individuals than on higher-income individuals and corporations. Taiwan/The Republic of China has a regressive income tax.
Even non income-taxes can be regressive relative to income. The regressivity of a particular tax often depends on the propensity of the tax payers to engage in the taxed activity relative to their income. To determine whether a tax is regresive, the income-elasticity of the good being taxed as well as the income-substitution effect must be considered.
Supply-side economics advocated regressive taxes as a means to solve the problem of stagflation. There is considerable debate as to whether regressive taxes are such a solution, in practice and in theory. It should be pointed out that the highest tax bracket in the United States before Reagan was 70%, a percentage viewed by some as being too high, and thus straining the main arguments for progressive taxes. Opponents of this high tax rate for the rich (or high tax rates for the rich in general) argue that it lowers the incentive to work and innovate, while proponents argue that since the rich are still indeed rich, their incentive is left intact (or, alternatively, they may argue that most of the rich no longer work and innovate once they reach a certain level of wealth). Finally, it should also be pointed out that currently (as of 2004) the highest tax bracket in the United States is 35%, one of the lowest in the world (it can be argued that the private health care system in the US is in effect a regressive tax, however; additionally, many US states levy their own income tax in addition to the federal rate).
It is natural to expect that some of those individuals and organizations which benefit most directly and most tangibly from a regressive tax (namely wealthy individuals and corporations), will advocate such a tax regardless of the mainstream positions for and against. Therefore it is suggested by detractors that regressive taxes are the darlings of the wealthy and of special interest groups. In fact there are numerous lobbies and political groups devoted to regressive taxes. Virtually all detractors of regressive taxation note that a regressive tax effectively punishes the poor for being poor, placing a higher burden on those least able to bear that burden.
Examples of Regressive Taxes
- Some payroll taxes, such as the Social Security payroll tax in the US. Its rate is 12.4% on income under $87,000 (only half of that is visible to employees, but all of it must be paid by the self-employed) but 0% on higher incomes. Whether this tax should properly be called regressive is disputed because the untaxed income cannot be counted in the benefit formula for computing retirement benefits. Therefore, this limit could be taken as a penalty on high-income earners (they are denied the ability to fully participate in the Social Security retirement program).
- Value-added tax or other sales tax on food and other essentials such as clothing, transport, and residential rents. Since the income elasticity of demand of food is usually less than 1 (see Engel's law), it tends to take up a higher percentage of the budget of a person or family with a lower income.
- Property tax is often called regressive, though it has also been cited as a progressive tax. Since the income elasticity of demand of housing is usually less than 1 and property taxes contribute to the cost of owning or renting housing, it often takes up a higher percentage of the budget of a person or family with a lower income. Whether this tax should properly be called regressive is disputed. First, only a fraction of property is used for housing. Most of the value held in property is tied to argicultural, manufacturing, and office facilities. This is both due to the greater acerage used for these purposes and the much greater value of the improvements which are often associated with the same. Second, high-income owners tend to own substantially (and disportionately) more property, either directly or through companies in which they hold stock. They also tend to own more industrial, retail, and office property than low-income earners. This effect is seen very strongly in municipalities financies. Those towns and cities with a large number of ratables (commercial property excluding rental housing) raise substantially more revenue than towns of equal wealth and size but fewer ratables. Thus, property taxation is more often progressive in practice.
- A poll tax is a fixed tax for each person: since each person pays the same amount, it is a lower proportion for people with higher incomes.
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