What is a Regressive Tax?
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.
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.
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 income.
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. 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.
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 one earns £1,000 a month, while consumer two 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 that consumer one pays 0.8% of their income as tax on their new shoes.
Meanwhile, consumer two pays 0.4% in tax (£8/£2,000=0.004, 0.004×100=0.4%).