Legal Definitions - regressive tax

Regressive Tax

A regressive tax is a type of tax that takes a larger percentage of income from low-income earners than from high-income earners. While the tax rate itself might be uniform or even a fixed amount for everyone, its practical effect is that individuals with lower incomes bear a heavier burden relative to their financial capacity, significantly reducing their disposable income more than it does for wealthier individuals.

Here are some examples:

• Sales Tax on Essential Goods: Consider a state that imposes a 7% sales tax on all retail purchases, including necessities like clothing and household items. A person earning $35,000 a year might spend $10,000 annually on these taxable goods, paying $700 in sales tax. This $700 represents 2% of their total income. In contrast, a person earning $350,000 a year might spend $20,000 annually on similar taxable goods, paying $1,400 in sales tax. While the wealthier individual pays more in absolute dollars, this $1,400 represents only 0.4% of their total income. The sales tax, despite being a flat rate for everyone, consumes a much larger proportion of the lower-income individual's earnings, making it regressive.
• Fixed Annual Utility Service Fee: Imagine a municipality charges a flat $50 monthly fee for trash collection services, regardless of household income or the amount of trash generated. For a household earning $40,000 a year, this $600 annual fee ($50 x 12 months) represents 1.5% of their annual income. However, for a household earning $200,000 a year, the same $600 annual fee represents only 0.3% of their annual income. The fixed nature of the fee means it constitutes a significantly larger percentage of income for the lower-earning household, demonstrating its regressive impact.