regressive tax
A tax that takes a larger percentage of income from low-income earners than high-income earners, such as sales tax or Social Security payroll tax with an income cap.
Example
“Sales tax is regressive — both a $30,000 earner and a $300,000 earner pay the same dollar amount on a $100 purchase, but it's a bigger share of the lower earner's income.”
Memory Tip
REGRESSIVE tax = hits lower earners harder as a percentage. Less fair than progressive.
Why It Matters
Understanding regressive taxes helps you recognize how different tax structures affect your finances based on your income level. This knowledge is important for evaluating the true cost of purchases and understanding how tax policy impacts wealth inequality and your overall financial burden.
Common Misconception
Many people assume all taxes are proportional to income, but regressive taxes actually hurt lower-income earners more severely. A person making $30,000 per year pays a much larger percentage of their income in sales tax compared to someone earning $300,000, even though both pay the same tax rate on purchases.
In Practice
Consider a family earning $40,000 annually spending $8,000 on taxable goods with a 7 percent sales tax, paying $560 or 1.4 percent of income in sales tax. A family earning $200,000 spending $50,000 on taxable goods pays the same $3,500 in sales tax but only 1.75 percent of their income, meaning the lower-income family bears a proportionally heavier tax burden.
Etymology
REGRESSIVE (going backward, decreasing) TAX. As income rises, the tax BURDEN REGRESSES (decreases as a percentage).
Common Misspellings
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Related Terms
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See Also
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