What is Regressive Taxation
Conventionally regressive taxation has been defined as a tax policy that results in the tax burden falling disproportionately on low-income earners. In contrast, high-income earners pay a lower percentage of their income in taxes. This means that as income decreases, the percentage of income paid in taxes increases.
In his book, A Taxing Problem – The Psychologist’s Prescription for a Just Tax System, the author, Dr. Mitch, puts a finer point on the definition. In other words, regressive taxation takes on a more significant meaning. First, taxation is broadly understood as any of the many ways the government finances its programs and activities. Second, the regressive nature of our institutionalized systems of taxation, or government revenue raising, is looked at with a view of wealth and wealth preservation, rather than income. Therefore, regressive taxation comes to mean the many ways that government is financed that land heavily on the backs of the poor and middle class to the benefit of the wealthiest among us.
Regressive taxation in this sense takes many forms, such as sales tax, and excise taxes, property taxes, park entrance fees, motor vehicle registration fees, driver’s license fees, road tolls, gasoline taxes, professional license related fees and charges, corporate filing fees, franchise taxes, tobacco taxes, etc., etc., etc. You get the point.
For example, a sales tax is regressive because it takes a larger percentage of wealth from those with less than with more. It’s true that sales tax has been demonstrated to be highly regressive when considered against incomes, but, it is even more so when considered against wealth.
Regressive taxation is often criticized for being unfair and inequitable, as it can exacerbate inequality and make it more difficult for low-income earners to build wealth, or even make ends meet. Progressive income taxation is a tax policy in which higher earners pay a higher percentage of their income in taxes while lower earners pay a lower percentage. Progressive income taxation is viewed as more equitable and fairer, but it is still very regressive when considered against wealth.
In her book Caste: The Origins of Our Discontents, Isabel Wilkerson, makes the point that what we criticize as institutional racism is better understood as caste. She states, “Caste is the granting or withholding of respect, status, honor, attention, privileges, resources, benefit of the doubt, and human kindness to someone on the basis of their perceived rank or standing in the hierarchy.” Her point, it seems, is well taken, especially when made in the context of her excellent book. Our systems of funding government and its programs have the effect of maintaining the caste systems in our country. Regressive taxation in the sense here described is fundamentally unfair, a point that is convincingly made in Dr. Mitch’s book, A Taxing Problem – The Psychologist’s Prescription for a Just Tax System.
Regressive taxation negatively impacts low-income earners and the overall impact on income inequality. It is crucial to consider the potential negative effects when implementing tax policies and to strive for more equitable and fair tax policies, such as Dr. Mitch’s proposal as detailed in his book, A Taxing Problem – The Psychologist’s Prescription for a Just Tax System.
Types of Regressive Taxation
Here are some of the types of regressive taxation:
Sales Taxes
Sales taxes are a form of regressive taxation imposed on the purchase of goods and services. They are typically imposed at the state or local level, and the tax rate can vary widely depending on the location and type of goods or services being taxed. Sales taxes are levied as a percentage of the price of the item being sold and are added to the total cost at the point of sale.
Sales taxes are regressive because they take a larger percentage of income from those with lower incomes, who may have to spend a larger proportion of their income on necessities such as food, clothing, and housing. Since the tax rate is the same for everyone, regardless of income level, it disproportionately impacts those with lower incomes and less wealth.
However, proponents of sales taxes argue that they are an essential source of revenue for state and local governments and can be an effective way to fund public services such as education, healthcare, and infrastructure. Sales taxes are also relatively easy to administer since they are collected at the point of sale and do not require extensive record-keeping or reporting.
Critics of sales taxes argue that they are regressive and unfair since they disproportionately affect low-income earners and those with little wealth. They also point out that sales taxes can be especially burdensome on those with fixed incomes or those living in poverty, who may have to spend a more significant portion of their income on taxable items.
Overall, sales taxes are a controversial form of taxation that can positively and negatively impact individuals and communities. While they have been an essential source of revenue for state and local governments, it is vital to consider the potential impacts on low-income earners and to strive for more equitable and fair tax policies.
Excise Taxes
Excise taxes are another regressive taxation like sales taxes but imposed on specific goods and services, such as tobacco products, alcohol, gasoline, and luxury goods. Unlike sales taxes, which are applied to a broad range of goods and services, excise taxes target specific products. Excise taxes are regressive because they, too, take a larger percentage of income from those with lower incomes and less wealth, who may be more likely to purchase these products. For example, a cigarette tax disproportionately affects low-income earners more likely to smoke than higher-income earners.
The goal of excise taxes is typically to discourage consumption of the taxed products, either for health or environmental reasons or to generate revenue for specific programs or initiatives. For example, income from gasoline taxes is often used to fund transportation infrastructure projects.
While excise taxes can effectively discourage the consumption of certain products and generate revenue for specific programs, they can also be controversial. Critics of excise taxes argue that they are regressive and unfairly burden low-income earners. They also point out that excise taxes can be challenging to administer and enforce and may create incentives for illegal activities such as smuggling.
Flat Taxes on Income
Flat taxes on income are regressive taxation where everyone pays the same percentage of their income in taxes, regardless of their income level. This means that a person earning $30,000 per year would pay the same percentage of their income in taxes as someone earning $300,000 per year.
Flat taxes are often seen as simple and easy to administer, as there is no need to calculate different tax rates based on income level. However, critics argue that flat taxes are unfair and regressive because they disproportionately impact low-income earners.
Since everyone pays the same percentage of their income in taxes under a flat tax system, low-income earners are disproportionately hurt. For example, a person earning $20,000 per year who pays 10% of their income in taxes would pay $2,000 in taxes, while someone earning $200,000 per year who also pays 10% of their income in taxes would pay $20,000 in taxes. The person earning $20,000 per year would be left with much less disposable income than the person earning $200,000.
Critics also argue that flat taxes on income do not consider the ability to pay. For example, someone earning $20,000 per year may struggle to pay for basic necessities such as housing, food, and healthcare, while someone earning $200,000 per year may have more disposable income to cover these expenses.
Overall, flat taxes on income are a controversial form of taxation that can have both benefits and drawbacks. While they are simple to administer, they can be seen as regressive and unfair to low-income earners. It is essential to consider the potential impacts on different income levels when implementing tax policies and strive for more equitable and fair tax policies, such as progressive taxation.
Historically, flat taxes on income have been proposed but not enacted. The popular appeal is based upon the ideas of simplicity and the appearance of fairness. But they have never been enacted into law because they are so unfair. In his book, A Taxing Problem. The Psychologist’s Prescription for a Just Tax System, Dr. Mitch, the author, proposes a flat tax of a different sort, a flat tax on wealth or net worth, as an important part of his prescription. His premise recognizes that in economic terms, the benefits of an organized society inure in direct proportion to wealth, since it is only through that organization, enforced by government, that anyone can accumulate and maintain control and possession of wealth.
Property Taxes
Property taxes are a type of taxation that is levied on the value of real estate, such as homes, land, and buildings. Local governments, such as cities or counties, usually impose property taxes. They are often used to fund local services such as schools, police and fire departments, and road maintenance.
The amount of property tax owed is typically calculated based on the property’s value, with higher-valued properties paying more in taxes than lower-valued properties. The tax rate can vary depending on the location and type of property being taxed.
Property taxes can be regressive because when they take a more significant percentage of income from those with lower incomes. For example, a person who owns a modest home valued at $100,000 may pay a more significant percentage of their income in property taxes than someone who owns a more expensive home valued at $1 million. Additionally, since property taxes are typically used to fund local services such as schools, police, and fire departments, neighborhoods with lower valued properties wind up with underfunded schools, police, and fire departments.
Social Security Payroll Taxes
Social Security payroll taxes are withheld from an individual’s paycheck to fund Social Security benefits. These taxes are levied on wages and salaries up to a certain amount, known as the Social Security wage base, adjusted annually. In 2022, the Social Security wage base will be $147,000.
The Social Security payroll tax is currently set at 12.4%, with employers and employees each contributing 6.2%. Self-employed individuals must pay both the employer and employee portions of the tax for a total of 12.4%. The tax funds the Social Security retirement, disability, and survivor benefits.
Social Security payroll taxes are regressive because they are levied on a fixed income up to the wage base. This means low-income earners pay more of their disposable income in Social Security payroll taxes than high-income earners. Consider the example of a person earning $50,000 per year. Total social security taxes paid on his income would be $6,200 per year. For someone earning $147,000 per year, $18,228 would be paid into social security. That would have a less significant impact on the lifestyle he could afford than $6,200 per year would have on the lifestyle of the $50,000 a year earner. At retirement age, the high earner would receive far more in social security benefits than lower earner. This reality means that the inequality between these earners is maintained even after retirement age. But the tax is even more regressive because for someone earning $500,000 a year only $18,228 is being paid into social security. This is only a little more than 3 ½ percent of his income.
Nevertheless, some view Social Security payroll taxes as progressive because the benefits they fund are designed to provide a safety net for those with lower incomes, such as retired or disabled individuals. Social Security benefits are calculated though based on an individual’s average lifetime earnings, with lower earners receiving a higher percentage of their pre-retirement income than higher earners.
Social Security payroll taxes are a controversial form of taxation that can positively and negatively impact individuals and communities. While they are considered regressive because they take a more significant percentage of income from low-income earners, they also fund essential social welfare programs that benefit those with lower incomes.
Who Does Regressive Taxation Benefit
Regressive taxation benefits higher-income earners, as they can absorb the tax burden more easily than lower-income earners. This is because lower-income earners typically have less disposable income and spend more of their income on necessities such as food, housing, and healthcare. Therefore, regressive taxation can disproportionately impact low-income earners and exacerbate income inequality and ultimately wealth inequality.
Regressive taxation can also benefit governments and other entities that rely on tax revenue to fund programs and services. Since some regressive taxes may be easier to administer than progressive taxes, they may be more attractive to government as a way to generate revenue without collecting extensive information. Of course, in our system, since elected officials must rely upon private funding to get elected, they also will be more inclined to maintain systems of taxation that benefit the wealthy. The benefits of regressive taxation are generally limited to those who can absorb the tax burden, such as higher-income earners, those with substantial accumulated wealth, and corporations. The same interests that elected officials depend upon to fund campaigns.
Who Does Regressive Taxation Hurt?
Regressive taxation tends to hurt lower-income earners more than higher-income earners. Regressive taxation hurts lower-income earners because lower-income earners have less disposable income and spend a larger proportion of their income on necessities such as food, housing, and healthcare. Regressive taxes, such as sales and excise taxes, increase the cost of these necessities and create a more considerable financial burden for those with limited income.
Regressive taxation exacerbates income and wealth inequality, disproportionately affecting those with lower incomes. This can make it more difficult for low-income earners to break out of poverty and improve their finances.
Regressive taxation hurts those struggling to make ends meet, such as low-income earners and those living in poverty. It is crucial to consider the potential impacts on different income levels carefully and to strive for a fair and equitable tax policy that supports the needs of all individuals and communities. In his thought-provoking book, A Taxing Problem. The Psychologist’s Prescription for a Just Tax System, Dr. Mitch does just that.
Conclusion
Regressive taxation is a form of taxation that tends to affect low-income earners and exacerbate income inequality disproportionately. Regressive taxation affects low-income people the most because regressive taxes, such as sales and excise taxes, take a more significant percentage of income from those with lower incomes, who may have to spend a more substantial proportion of their income on necessities.
While regressive taxation can be an easy way to generate revenue for governments and other entities, it can create financial burdens for those struggling to make ends meet. These financial burdens can make it more difficult for low-income earners to break out of poverty and improve their finances.
It is important to carefully consider the potential impacts on different income levels when implementing tax policies and to strive for a fair and equitable tax policy that supports the needs of all individuals and communities. While regressive taxation may be attractive in the short term, it can create long-term negative impacts on those who are already marginalized and struggling to make ends meet.