Introduction
Taxes are mandatory levies contributed by all citizens of a nation/country to the government either as a percentage of workers’ wages, business profits or included in the price of goods and services. Taxes take different forms, we have a progressive tax, regressive tax, and proportional tax. This paper solely lays emphasis on the understanding of regressive taxes.
What is a Regressive Tax?
A regressive tax is a levy enforced in such a way, to the point that the tax rate diminishes as the sum subject to tax assessment increases. It is not imposed as an income-based tax but it is a tax in which the rate is uniform among all citizens in the state. This kind of tax puts a lot of burden on those citizens with low-income than those citizens with higher income per year.
In any state or country, it is a norm to find different classes of the people which can be simply divided into two groups: The rich group and the poor group. The poor group of citizens strive to afford the three basic needs of life: Shelter, food and clothing. A large percentage of their income goes into these three basic needs. The rich group on the hand, do not need to strive before getting whatever they need. A smaller percentage of their income goes into basic needs. However, since a regressive tax is usually uniform, it therefore has adverse effects on the income of a poor citizen.
For example, If individual receives income of $8,000 per year, and pays 20% of his income on tax. He pays $1,600 as tax. If a higher income earner receives income of $45,000 per year, he only pays about 3.56% of his income to meet the $1,600 tax. The more an individual makes, the less the tax burden. All the tax burden is shifted to the low income earners.
Types of Regressive Tax
Regressive system of taxation cuts across the various taxes we have with uniform tax levies. We have about two types of Regressive taxes which includes:
- Sales Taxes: This is simply a kind of tax collected by the seller on the goods purchased. It is required to be paid after purchase of the goods. For example, A very successful car dealer and an environmental lawyer enters a store to purchase some items. They both purchased the same amount of goods costing about $300. The income of the car dealer is $100,000 per month while that of the lawyer is just $250. If they both pay the same amount of tax on the sales made, the proportion of tax amount to income of the lawyer would be more than that of the car dealer. Thus, regressive tax.
- Sin Tax: This is a type of tax on goods that have been considered harmful to the society such as drugs, tobacco, alcohol and so on. They are utilized to add to the cost with an end goal to bring down their utilization.
Addressing Regressive Taxes
By using local Bentleigh accountants you can make sure that you avoid excessive regressive taxes.
