regressive tax

Picture two shoppers buying the same 5-dollar loaf of bread, paying the same 50 cents in sales tax. For a wealthy person earning a lot, 50 cents is a rounding error. For someone scraping by, that same 50 cents is a meaningful bite out of a tiny budget. The poorer person pays a larger fraction of their income on that tax even though the dollar amount is identical. A regressive tax is one where the average tax rate falls as income rises — it takes a bigger share from those who earn less.

A tax can be regressive in two ways. Some are explicitly regressive in rate (rare today). Far more common are taxes that are flat or even progressive on the thing taxed, but regressive relative to income because of how people spend. Sales taxes and VAT are the classic case: everyone pays the same percentage on what they buy, but lower-income households spend nearly all of what they earn (and save little), while richer households save a large part, so a smaller fraction of a rich person's income ever gets hit by the consumption tax. Numerically: if a poor family spends 100 percent of a 20,000 income and a rich family spends 50 percent of a 200,000 income, a 10 percent sales tax costs the poor family 10 percent of income but the rich family only 5 percent.

Regressive taxes matter because they shape fairness in the opposite direction from progressive ones. They are not automatically bad — they tend to be simple, hard to evade, and good at raising revenue, and some (like fuel or tobacco taxes) are deliberately used to discourage harmful behaviour. But because they hit the poor proportionally harder, governments often soften them by exempting essentials (food, medicine) from sales tax or by pairing them with rebates. The honest tension: the most efficient, easy-to-collect taxes are often the least equitable, so designing a tax system is always a balance between efficiency and equity.