Regressive Tax Example
The system of the taxation where persons of the country are being taxed at the same rate without considering their income level and the examples of which includes 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 earning of the high-income group. Some of the products on which the regressive taxesRegressive TaxesA regressive tax is the system of taxation where all citizens in the country are taxed at the same rate without considering their income levels. As a result, a more significant percentage of the income of the low-income group is charged as tax compared to the high-income group. are applicable include food, alcohol, tobacco, parking permits, museum tickets, public park admissions, other public places tickets and tolls fees, etc.
Top 4 Examples of Regressive Tax
#1 – Sales Tax
In the case of the sales taxSales TaxThe government levies sales tax on the consumption of various goods and services as the percentage added to the product and services from which the government earns revenue and does the company's welfare. In the United States, 38 different states have different taxes, from Alaska (1.76%) to Tennessee (9.45%)., the same tax rate is applied by the governments uniformly to all of the consumers on the basis of product 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 % [(33.75 / 1,000) *100] and for the second person percentage of tax paid by him with respect to his income comes to 0.34 % [(33.75 / 10,000) *100] 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 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 % [(80 / 20,000) *100] and for Mr. Y percentage of tax paid by him with respect to his income comes only to 0.05 % [(80 / 160,000) *100]. 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 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.
Thus in 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 large 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 the government officials and the 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 rebateA RebateA rebate is a cashback to the customers against the purchase as a completing transaction incentive. Rebates are offered after the sale. Thus, it is a form of marketing strategy provided to the client to facilitate future transactions. on tax if they fall below a certain level of income bracket.
This article has been a guide to regressive tax examples. Here we discuss the top 4 examples of a regressive tax, including property tax, sin tax, sales tax, user fees, etc. You can learn more about accounting from the following articles –