There are two main types of tax systems utilized by nations: regressive taxes and progressive taxes. Most nations use a combination of regressive and progressive tax systems, not just one.
The U.S. features both regressive and progressive tax systems. For example, income taxes in the United States are progressive taxes because the more money an individual or family earns, the higher their tax rate will be.
Read More: Your Guide to Filing Taxes
8 Regressive Tax Examples
There are also a number of regressive taxes that are assessed at the federal, state, and local levels.
Following are some common taxes that are regressive.
1. 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.
2. “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.
3. 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.
4. Gasoline taxes
The federal gasoline tax is 18.3 cents per gallon while the average state gasoline tax is 27.8 cents per gallon. The gas tax is less regressive than cigarette taxes. The bottom 20% of U.S. households spend 4% on gasoline, while the top 20% spend 3%.
5. Payroll taxes
All employees pay 6.2% of their income in Social Security payroll taxes until income reaches a certain level ($147,000 in 2022). 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.
6. User fees
Not technically considered taxes, these are fees charged by the government for the use of public facilities or services. They include fees paid to drive on toll roads and bridges, entry fees to national parks and museums, vehicle registration and driver’s license fees, building permits and inspection fees.
These are excise taxes paid on goods imported into the country. Retailers raise the price of goods to cover the tax, which effectively passes the tax on to consumers. In the U.S., tariffs are mainly imposed on food, clothing, chemicals and manufactured goods, except on imports from countries with which we have free trade agreements.
8. Flat taxes
Also known as flat-rate tax, these are taxes with a single rate for everyone regardless of their income. Common examples are government taxes applied to Social Security and Medicare.
Impact of Regressive Taxation on Low Earners
A regressive tax is generally considered to have a disproportionate impact on those who earn the least amount of money because it doesn’t factor income levels into the equation. Instead, the tax is applied uniformly to everyone in all situations. This results in low earners paying a higher rate 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 spend 15% of their household income on food and 35% on shelter and utilities. In comparison, the top 20% of U.S. households from an income standpoint spend just 11% of their household income on food and 33% on shelter and utilities.
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.
Read More: The Average 401k Balance By Age
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