Regressive Tax - Common Examples

Common Examples

• Taxation based on everyday essentials like food (eg sales tax, salt tax), clothing (value added tax), transport (fuel tax), energy (carbon tax) and housing (council tax, window tax) are frequently regressive. The income elasticity of demand of food for example is usually less than 1 (inelastic) (see Engel's law) and therefore as a household's income rises, even significantly, the tax collected remains almost the same. So as a proportion of available expenditure the tax burden falls far more heavily on households with lower incomes.
• A tax with a cap, above which no taxes are paid. The United States payroll tax is an example of this.
• 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.
• The so called sin taxes are also criticized for being regressive, as it is assumed that they are often consumed more (or at least at a greater proportion) by the lower classes. For example, "people in the bottom income quintile spend a 78% larger share of their income on alcohol taxes than people in the top quintile." Tobacco in particular is highly regressive, with the bottom quintile of income paying an effective rate 583% higher than that of the top quintile.
• An allowance reduction in an income tax system allows for an individual's personal allowance to be withdrawn, making a higher marginal tax for a limited band before returning to the underlying rate. In the UK there is an effective 60% band at £100,000 that returns to 40% at £113,000.