What is regressive tax?
Understanding the different types of taxes in the UK and how you’re being taxed is important if you want to know where your money is going and accurately keep track of your personal finances. On this page, you’ll learn what regressive tax is, the different types of regressive taxes and the impact of regressive tax.
- Definition: Regressive tax is a type of tax that is applied regardless of your income, so low-income and high-income earners pay the same rate
- Regressive vs. progressive tax: Regressive tax is the direct opposite of progressive tax, which is when higher income earners pay more tax than those on a lower income
- Effects: Regressive tax particularly affects low-income earners, because they pay a disproportionately high amount compared to their income
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Regressive tax explained
A regressive tax* is a tax applied uniformly to everyone, no matter your income. This effectively means that the percentage of your income you pay in regressive taxes decreases for those who earn higher incomes, as illustrated by the table below, so those with a higher income pay a lower percentage of their income as tax than those with a lower income.
This is because, for low-income households, a greater percentage of income is needed for essential expenses such as food, housing, transportation and healthcare. Low- income households also tend to use more of their income on these basics in comparison to those who earn more, due to the difference in incomes.
For example, a weekly food shop costing £150 is half of the income for someone who earns £300 a week, whereas for someone earning £600 a week, this shop is just a quarter of their weekly wage.
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What’s the difference between regressive and progressive tax?
Progressive tax is pretty much the opposite of regressive tax. If a tax is progressive, it increases based on the amount you earn.
Income tax is a good example of this, because there are different tax bands for different earners. The amount of income tax payable increases as your salary increases, meaning that those who earn more money pay more tax. With income tax, your individual finances are taken into account. Regressive tax, on the other hand, is usually a blanket amount that does not consider individual earnings.
While regressive tax disproportionately affects people on a low income, progressive tax affects those with a high income. If you earn a higher income, you’ll pay a higher tax rate than those with lower incomes. Progressive tax is designed so that low-income earners don’t spend an unreasonable amount of their income on tax.
What are the types of regressive taxes?
The following are some of the different types of regressive taxes in the UK:
- Sales tax: This is applied to most purchases, regardless of your income level. You may also hear it referred to as an indirect tax. Sales tax is considered regressive because people with low incomes are affected more than those with higher incomes from the tax that comes with the purchase. The result is that low-income earners pay a higher percentage of their income on sales tax.
- Property tax: This is the amount of tax you’ll pay based on the value of the property. If low-income and high-income earners purchase properties of the same value, they will pay the same amount in property tax. Again, this means that the buyer with the lower income will be affected more because they are paying a higher percentage in terms of their income.
- Sin tax: This tax is applied to goods which are considered harmful to an individual or society, such as tobacco and alcohol. Although sin tax is typically higher than taxes on other goods, it’s the same for both high-income and low-income earners, and is therefore a regressive tax. According to a report from the Institute of Economic Affairs, poorer households pay up to 10 times more in sin taxes than wealthier households as a share of their income.
What’s the impact of regressive taxes?
The impact of regressive tax differs from person to person, as it largely depends on your monthly income and the type of goods you buy.
For example, if two people purchase the same pair of £150 shoes, they will both pay £8 in tax. Let’s say that consumer 1 earns £1,000 a month, while consumer 2 earns £2,000 a month.
By dividing the tax of £8 on consumer one’s income (£8/£1,000=0.008), we then multiply by 100 to get the percentage of tax (0.008×100=0.8%). This means consumer 1 pays 0.8% of their income as tax on their new shoes.
Meanwhile, consumer 2 pays 0.4% in tax (£8/£2,000=0.004, 0.004×100=0.4%).
Why do regressive taxes affect the poor more?
Applying this same principle to every purchase that includes sales tax in one month offers a glimpse into the disproportionate impact of regressive tax on low-income earners. Regressive taxes affect the poor more because it’s applied uniformly, regardless of the income you earn and the tax band you’re in.
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