Regressive Tax

A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "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. In terms of individual income and wealth, 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.

It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Regressive taxes tend 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, in which the average tax rate increases as the amount subject to taxation increases. 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, in which every person has to pay the same amount of money. The regressivity of a particular tax often depends on the propensity of the taxpayers 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, 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.