Regressive tax

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A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.^{[1][2][3][4][5]} In simple terms, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer's ability to pay as measured by assets, consumption, or income. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the marginal tax rate.^[6][7] It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Regressive taxes attempt to reduce the tax incidence of people with higher ability-to-pay, as they shift the incidence disproportionately to those with lower ability-to-pay. The opposite of a regressive tax is a progressive tax, where the tax rate increases as the amount subject to taxation increases.^{[8][9][10][11]} In between is a flat or proportional tax, where the tax rate is fixed as the amount subject to taxation increases.

The term is frequently applied in reference to fixed taxes, where every person has to pay the same amount of money. 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. In other words, if the activity being taxed is more likely to be carried out by the poor and less likely to be carried out by the rich, then the tax may be considered regressive. To determine whether a tax is regressive, the income-elasticity of the good being taxed as well as the income-substitution effect must be considered.

Contents 1 Examples 2 See also 3 Notes 4 External links

[edit] Examples

A value-added tax or other sales tax on food and other essentials such as clothing, transport, and residential rents can be regressive. 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. A poll tax is a fixed tax for each person: since each person pays the same amount of money, it is a lower proportion for people with higher incomes. Television licences that are implemented in many countries, especially in Europe, are considered regressive taxes and in most cases consist of a flat annual payment for the use of a television. Sin taxes are also criticized for being regressive, since the products taxed (usually alcohol and tobacco) are often consumed more (or at least at a greater proportion) by the lower classes.

Property taxes are often called regressive.^{[citation needed]} Because the income elasticity of demand of housing is usually less than 1 and property taxes contribute to the cost of owning or renting housing, property taxes often consume a higher percentage of a lower income budget than they do for a higher income budget. The regressive aspects of property taxes are, however, disputed.^{[citation needed]} Only a fraction of property is used for housing, with most of the value held in property being tied to agricultural, manufacturing, and office facilities. This is both due to the greater area used for non-residential purposes and the much greater value of the improvements often associated with the same.

And when only land value (as opposed to real estate value which is improvements plus land value), it is has never been disputed that ownership of land value is even more maldistributed than income. See Land Value Taxation. For example, in Baltimore City the top 10% of land owners (all corporations) in Baltimore, MD own just over 58% of the total land value, the bottom 10% of those who own any land at all account for less than 1% of the total land value.^[12] In Baltimore the homeownership rate is about 51% according to the Census Bureau, while few households have zero income.

High-income owners may also tend to own substantially (and disproportionately) more property, either directly or through companies in which they hold stock. High income owners also tend to own more industrial, retail, and office property than low-income earners, with this effect seen strongly in the finances of municipalities. 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.^{[citation needed]} Thus, property taxation is arguably more often progressive in practice. William H. Gates, Sr., the father of Microsoft co-founder Bill Gates, came to a different conclusion in a 2003 study of tax schemes California, Idaho, Oregon, and Washington, arguing that property taxes were regressive by one to three percent (depending on the state), between the lowest and highest income brackets.^{[citation needed]}

The New York Times in June 2005 ran a high-profile campaign arguing that at the very-high incomes United States tax-payers actually face regressive taxation rates, equating income tax across wage and rental incomes. For instance, they project that if the Bush tax cuts are made permanent: “By 2015, those making between $80,000 and $400,000 will pay as much as 13.9 percentage points more of their income in federal taxes than those making more than $400,000.”^[13] In response to this, N. Gregory Mankiw has written to the editor of the New York Times, arguing that wealth condensation is a cyclical phenomenon and that tax rates should not be adjusted to stabilize the share of income going to the top 0.1 percent of earners in boom years and depressions. He closes with another recurring argument against progressive taxes: “If policy makers' primary goal is … economic prosperity for all, they should avoid focusing on the politics of envy.”^[14] Investor and multi-billionaire Warren Buffett has criticized the U.S. tax code as highly regressive, citing himself as an example: with an income of over $46 million, Buffet pays a tax rate of 17.7 percent, whereas his receptionist pays a tax rate of 30 percent.^[15]

[edit] See also

• Lump-sum tax
• Progressive tax
• Proportional tax
• Tax incidence
• Laffer curve
• Suits index

[edit] Notes

[edit] External links

Wikiquote has a collection of quotations related to: Taxation

• Historic Struggles - A chapter from the 2004 book, Greed and Good ISBN 1-891843-25-7, that traces the history of efforts to create and maintain a progressive tax structure in the United States.