Regressive Tax

A tax is regressive if it requires those with lower income or wealth to pay a higher fraction of their [Page 1786]income in tax. A sales tax, which can be levied either at the point of purchase or at various points in the product or sales process, is generally regressive. Sales taxes are also sometimes called commodity or excise taxes.

Taxes can be classified as regressive, proportionate, and progressive. A proportionate tax takes the same portion of each individual's income. Sales taxes are a fixed percentage tax on the cost of goods purchased. Yet such taxes are in practice regressive, because those with lower incomes use a larger portion of their income for necessities, such as food and clothing. A sales tax that exempts food can result in a more proportionate tax. Taxes on cigarettes and alcohol are regressive sales taxes imposed to achieve a social good (to reduce smoking and excessive use of alcohol).

A progressive tax requires those with higher income to pay a larger fraction of their income in tax. A graduated progressive income tax increases that fraction as income increases. Estate and inheritance taxes are progressive taxes, since those with greater wealth pay a higher portion of their wealth in taxes. Most governments use an “ability to pay” principle and, accordingly, seek to make their income taxes progressive. This is considered more just and equitable.

A progressive tax reduces inequality of income, while a regressive tax increases inequality. Horizontal equity in taxes (equal treatment of equals) requires that people earning the same amount and having the same expenses pay the same tax. If horizontal equity does not exist, people often protest. Because of the many tax deductions and “loopholes” in the U.S. tax code, which are often deemed to be unjust, some advocate a proportionate (or a flat) tax—the same tax rate for all incomes.

Most philosophers (including Aquinas, Rousseau, and Rawls) hold that in justice people should be taxed according to their means—that is, the wealthy should pay a greater portion of their income in tax. Social justice calls for a sufficient income to feed, house, clothe, and educate a family. And those with larger incomes have a greater obligation to help provide necessary government services. Thus, a regressive tax is unjust; it is not a fair distribution of the tax burden. John Locke maintained that private property was a natural right; however, he also acknowledged that an individual does not have as firm a right to wealth beyond what he or she can use. On the other hand, conservatives argue from consequences that it is ethical to impose less tax on the wealthy. When the rich have greater income it benefits all, since their income supplies new investment and purchases goods and services which in turn provides many with jobs and family income.

The ethics of taxation has been described as an uneasy truce between good citizenship and personal greed. Supreme Court Justice Oliver Wendell Holmes said that “taxes are the price we pay for civilization.” On the other hand, the U.S. tax code has been interpreted by courts as not requiring an individual to pay more taxes than are absolutely required. Hence, taxpayers self-assess their own tax returns, and they seek to pay as little tax as possible.

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