Regressive taxation refers to the system of the taxation under which all of the persons in the country are taxed at the same rate without giving the consideration to the income level of those persons due to which greater percentage of the income of the low-income group is charged as tax when compared with the high-income group in same country.
Regressive Tax Definition
A regressive tax is a simple type of tax system to calculate tax which is levied on all the citizens of the country irrespective of their income. Here every citizen should pay the same amount of tax. This is called regressive because the higher income group pays less tax than the lower income group people. The major part of the income is paid as a tax by the lower-income citizens. A regressive tax is mostly not levied on the income tax.
Example of Regressive Tax
Suppose if person A is earning INR100000 as income and pays INR20000 as the tax which is 20% of the income and person B is earning INR200000 and pays INR20000 as the tax which is 10% to meet the same amount of tax paid by A.
Regressive tax is the type of tax followed by the developing countries where a high amount of revenue is required for the countries developmental programs, this tax is very simple to calculate as the tax amount is fixed for all the income range people and the income of the people in the less-developed countries will be almost similar and income difference will be less when compared to the income difference of the people who are living in developed countries. Less developed countries choose to follow this tax as the income disparity will be less and High graded professionals and high technology are not required to calculate the tax.
The opposite of regressive tax is called a progressive tax where if a citizen is earning more the tax rate will be higher and if the income of a citizen is less the tax rate will be less. Example: suppose if person A is earning Rs100000 as income and pays INR10000 as the tax which is 10% of the income and person B is earning INR200000 and pays INR30000 as the tax which is 15% to meet the same amount of tax paid by A.
Types of Taxes used for Regressive Taxes with Example
The following are types of Tax used for Regressive Taxes with examples
#1 – Sales tax
It is the tax levied on the goods and services. Tax is levied on the purchase price or the cost price of the product. For example, if a person purchases a television a pre-determined percentage of tax will be levied on the cost of the television irrespective of the income of a person. Where the sales tax will be the same for all the citizens of the country irrespective of the income.
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#2 – Property tax/ Revenue tax:
Property tax is the amount paid by the property holders. When 2 different people whose income is different and the lives in the same locality have to pay the same amount of tax to the government and the tax is paid on the property owned but not on the income earned by the individuals. This tax is levied on the basis of the location, dimension, and size of the property. Example: If A and B who have an income of INR100000 and INR200000 respectively and owns land with the dimension of 100*100 should pay the same amount of tax irrespective of their income.
#3 – Excise tax:
An excise tax is regressive in nature. The excise tax is an indirect tax where the tax is not paid by the consumers directly but the tax is passed on the merchant or producers to the wholesalers, from wholesalers to retailers and from retailers to consumers indirectly. This excise tax is levied on the products like petrol, alcohol, and tobacco, the tax rate is relatively high when compared with other forms of tax as these taxes are one of the high revenue-generating to the government.
Regressive Tax Example: the tax on petrol will be the same for all groups of people irrespective of income and it is levied on the quantity of petrol purchased.
#4 – Tariff:
It is the tax levied on the imports and export of goods where the tax levied on the goods will ultimately hit the consumers who purchase the products. If the high rate of tax is imposed on the necessary goods which is imported or exported then it will be a burden for the low-income group to purchase these goods, but they will not have any option other than purchasing it, because it is a necessity for the daily living.
#5 – Precious metals and Ornamental tax:
This type of regressive tax is levied by the government on the rare metal items like gold, silver and platinum ornaments. Where in some of the countries purchase of gold is a tradition in the country like India at the time of marriage and celebrations Etc? where the tax is levied on the quantity of the metal purchased but not on the income of the people. The tax rate is increased for the rare metals and diamonds because these are rarely found and this increases the revenue flow to the government
Regressive Tax Example: if a 10% tax is levied on the precious metals. If A and B who have the income of INR100000 and INR200000 respectively and purchase gold of 100gms and 200gms. The tax will be 10% on the market value per gram gold.
#6 – Taxes on lottery and Gambling:
They are more regressive in nature as the tax rates will be flat irrespective of the amount won in the lottery or gambling.
Regressive Tax Example: If a person wins a lottery of INR500000 the tax rate will be flat 40% and when another person wins a lottery worth INR20000 then also the tax rate will be 40%. Here irrespective of the amount tax rate will be the same for all the citizens.
Advantages of Regressive Tax
- Regressive tax helps to reduce the demand for goods like tobacco and alcohol products.
- It encourages people to earn more like a tax. The tax amount will be fixed and not fluctuating on the income earned.
- More convenient to calculate. As the tax is flat and high technology is not required.
- People get the freedom to choose the products they need and the tax can be paid only on the goods they need. Only the people who need the product shall pay for the goods.
- Investment level will get increased as the high income will pay less tax and the savings level will get increased and the savings will be channelized as the investment.
Disadvantages of Regressive Tax
- Regressive Tax paid by the poor will be more and the income left for their living will be less as a major part of the earning will be paid as tax.
- The unemployment level increases as the poor might not be willing to work as the major part of the earning should be paid as tax.
- Revenue might decrease if the consumption of goods is reduced by low-income people.
- Wealthier will continue to earn more and low-income groups will continue to earn less.
- Tax skimming will be encouraged as low-income people tend to hide the liquid cash.
Regressive tax is a simple type of tax levied on the citizens of a country and the tax is not levied on the income instead a flat amount is levied for everyone which is a very convenient form of tax for the developing and underdeveloped countries which helps for the development of the countries but this type of tax is good only for the countries where the income difference among the people is less and the income earned is similar to each other So there will be no discrimination on the tax levied.
This has been a guide to what is Regressive Tax. Here we have discussed the types of Regressive Taxes with examples and its advantages and disadvantages. You may learn more about our articles below on accounting –