Regressive Tax Examples

The system of taxation is where persons of the country are being taxed at the same rate without considering their income level and examples of which include sales tax, flat tax, property tax, user fees, sin taxes, and all those taxes where there is a flat rate of taxation.

This system takes a greater percentage of the earnings of the low-income group rather than the earnings of the high-income group. Some of the products on which the regressive taxes are applicable include food, alcohol, tobacco, parking permits, museum tickets, public park admissions, other public places tickets and tolls fees, etc.

Regressive tax system refers to the tax system where the tax levied on an individual or a company decreases with the amount of taxable amount. On the outset, it seems reasonable for such a tax system to be implied.

However, upon taking a closer look it becomes crystal clear that the lower-income earning citizens end up paying a significantly higher tax percentage from their earnings. This system of taxation has been considered to be both an advantage and disadvantage for the economy. Despite mixed opinions on the subject, it continues to soar in some parts of the world.

Therefore, in the case of the regressive tax, the rate of tax or the total tax remains the same and does not change with the increase in the level of income of the individual. It typically places a larger burden on the people earning low income in the economy than the high-income earner group. On average, the regressive tax system is not favored, and different steps to move in the direction of the progressive tax have been considered by government officials and different policymakers. Some countries have eliminated the sales tax on some basic necessities items such as food as more amounts are being spent by the low-income section of the country on food than the high-income group.

Other countries adopted the system to send the checks for giving a rebate on tax if they fall below a certain level of income bracket.

Let us understand the regressive tax system by understanding different types and their examples in detail through the discussion below.

#1 - Sales Tax

In the case of the sales tax, the same tax rate is applied by the governments uniformly to all of the consumers on the basis of products bought by them irrespective of their income or earnings.

Like, for example, two individuals went to the grocery shop to purchase some items. Each of the people purchases groceries worth $ 450 from the grocery shop per month, on which the state tax rate is 7.5 %. So, in this case, both of the individuals pay $ 33.75 ($ 450 *7.5 %) for the tax portion. In a year’s time, the total sales tax amount would be $ 405 for each person.

Now the first individual earns $ 1,000 per month, and the second individual earns $ 10,000 per month. The amount of sales tax affects both of the persons differently. For the first person percentage of tax paid by him with respect to his income comes to 3.38 % and for the second person percentage of tax paid by him with respect to his income comes to 0.34 % only.

Although there is the same rate of tax in this case for both of the individuals a person who is having the lower-income have to pay a higher percentage of his income as tax whereas the person who is having the higher income have to pay a lower percentage of his income as tax, making tax regressive.

#2 - Property Taxes

The taxes on the property purchased by the individuals are levied at a flat rate on the basis of the value of property regardless of the income they are earning. So if two persons buy the homes of equal amounts in the same neighborhood, then they have to pay the same tax on property irrespective of their level of income.

For example, two people X and Y having an income of $ 200,000, and $ 500,000 purchased a property at the nearby place, having the same dimensions and having the same value. Now the rate of tax on the property will be the same for both of the persons irrespective of the income earned by them during the period.

So this makes the property tax as the regressive tax as the same is based on the property’s value and not on the income of the person buying it.

#3 - User Fees

User fees include the fees which are paid by the individuals for having access to places such as museum tickets, public park admissions, other public places tickets and tolls fees, etc. and the fees for obtaining the licenses and the identity cards.

For example, Mr. X and Mr. Y went to the museum, which is government-funded, along with their families having 4 members each and paid the $ 20 per person as the fees for the ticket for admission, making to $ 80 per family. The income of Mr. X is around $ 20,000 per year, whereas the income of Mr. Y is around $ 160,000 per annum. The amount of User fees affects both of the persons differently.

For Mr. X percentage of tax paid by him with respect to his income comes to 0.4 % and for Mr. Y percentage of tax paid by him with respect to his income comes only to 0.05 % . Thus the fee for Mr. X amounts to their larger income portion than that of the Y’s who earn around $ 160,000 per year. Thus user fees are the regressive tax that is levied by the government.

#4 - Sin Tax

The taxes which are levied on goods which are considered to be harmful to the society are known as the Sin tax. These include goods such as alcohol, tobacco, etc., and are highly regressive as the consumption differs between high and high-income population groups. Also, a person who generally earns less consumes more harmful products when compared with the individuals earning more amounts.

For example, Mr. A has an income of $ 5,000 per year, spends $ 500 on buying alcohol, whereas Mr. Y is earning $ 500,000 per year and also spends $ 500 yearly on buying alcohol. Both the persons have to pay tax on $ 500 at the same rate irrespective of the income earned by them. So, a sin tax is considered to be the regressive tax.

This article has been a guide to Regressive Tax examples, Here we explain examples of regressive tax including property tax, sin tax, sales tax, user fees, etc. You can learn more about accounting from the following articles –

• Calculate Excise Tax
• Calculation of Proportional Tax
• Progressive Tax
• Deferred Income Tax
• Surtax