Do you know what is the meaning of regressive tax? In a regressive tax system, low-income breadwinners pay more taxes than those with higher incomes.
Under a regressive tax system, the burden of tax falls more heavily on workers with lower incomes, affecting them more than those with higher incomes.
What are Taxes?
Financial contributions individuals and corporations make to the government are known as taxes. The amount is gathered at certain levels:
- Federal
- State, or
- Municipal
Reach out to our tax consultancy services.
What are the Three Types of Tax Systems?
There are three types of taxes:
- Regressive
- Proportional, and
- Progressive
What is the Meaning of Regressive Tax?
Under a regressive tax system, everyone pays the exact taxation cost regardless of their annual income. This would seem reasonable in theory. However, low-income earners are unjustly impacted.
For instance, the progressive income tax system in the US means that higher earnings pay more taxes.
In contrast, sales and excise taxes are regressive. Although they are levied equally, low-income people pay a higher share.
Read: What is a VAT number in the US?
Types of Regressive Taxes
Several tax types are seen as regressive because they affect those with lower incomes. Among the most prevalent regressive taxes are:
Sales Tax
Sales tax is applied to all purchases irrespective of income. Every citizen is levied the same taxation cost. However, people with comparatively lower wages pay a hefty portion of their income.
Read about the property taxes on new construction.
Excise Tax
Many unhealthy or illegitimate products are under the influence of excise tax. These products can be:
- Tobacco
- Alcohol
- Fuel for automobiles
Typically, less-wage earners purchase such goods. Therefore, they are charged more despite the state’s attempts to discourage their use.
Read: Do strippers pay taxes?
User Fees
Regressive taxes include fees for services like:
- Driver’s licenses
- Park entrances, and
- Tolls
These costs are fixed. Therefore, those with lower incomes must pay more of their income to use these services.
The Bottom Line
So, now you know what is the meaning of regressive tax.
Regressive taxes improperly affect low-income breadwinners. They are forced to pay a higher proportion of their income in taxes. These taxes are prevalent in many countries. They are burdensome for people who are less financially competent. Therefore, regressive taxes are frequently seen as unjust by nations.
Contact L&Y Tax Advisor to ease the payment of regressive tax based on your income.
