Regressive taxation is a system, which levies a tax on each individual if they are a tax-paying citizen at the same rate, irrespective of the income earned. Thus, all citizens must pay the same tax amount. As the term ‘regressive’ suggests, regressive tax makes the high-income group pay fewer taxes than the low-income group.
Regressive taxes are not charged based on your income, but they are levied in the form of sales taxes, excise taxes, property taxes, government taxes, etc. A regressive tax is just the opposite of progressive taxes, which is determined based on your current income tax slab. Note that, in the case of a progressive tax system, the higher your income, the higher the tax amount you may have to bear.
Scandinavian countries such as Denmark, Switzerland, Norway, Sweden, and the Netherlands follow a regressive tax approach.
How does the regressive tax system function?
As mentioned above, in a regressive tax system, taxes are charged uniformly throughout all income groups, so there is no scope for tax planning here. This may adversely impact the lower-income group than the higher-income group. It is often viewed as unjust in many cases, and as an outcome, most countries abide by a progressive income tax system instead of regressive.
Kinds of regressive taxes
Below listed are the popular kinds of regressive taxes –
-
Sales tax
Sales tax is charged on the purchase price or product cost and is same for all. The charge levied as sales tax may aggressively impact you if you fall in the lower income group.
-
Government fee
The government may charge a few for government-backed services, driver’s license costs, identification cards, toll charges for bridges, roads, etc.
-
Sin tax
A sin tax is charged by the government on goods and products considered harmful to society. Such sin taxes are included in the original price of the products like alcohol, and tobacco to dissuade you from buying the same.
-
Tariffs
Government charges tariffs on the export and import of goods wherein you as a consumer must bear the taxes for purchasing such goods. Incurring a high rate on exports or imports may burden you if you fall in the low-income group as you have zero choices but to buy the products as they are necessities.
-
Taxes on gambling and lottery
Taxes on gambling and lottery are extremely regressive as these are charged at a flat rate irrespective of the amount that you have won in the lottery or on gambling.
Instances of regressive tax
Regressive tax instances for taxes on gambling and lottery and taxes on ornaments and precious metals are mentioned below –
- Example No. 1 – Consider X and Y win a jackpot of Rs 5 lakh and Rs 10,000, respectively. Here, X and Y, both must pay a tax on the jackpot at the same rate irrespective of the amount earned.
- Example No. 2 – Assume the tax rate on precious ornaments and metals is set at 10 per cent. X and Y earn an annual income of Rs 4,00,000 and Rs 10,00,000, respectively. Both bought gold of 200 grams and 100 grams, respectively. While there is a considerable difference in the earnings of both, still both must pay the same tax rate, i.e., 10 per cent.
Benefits of regressive tax
Listed below are some of the crucial benefits of regressive tax –
- Regressive tax assist government to control demands for products that are detrimental to society like alcohol and tobacco.
- Very convenient to compute. This is because the tax is flat, and the implementation of technology is not needed
- Investment level will be enhanced as high-income group will pay less tax. This will result in increased savings and savings will get channelised as investment. We must understand importance of tax planning to pay less tax.
Ending note
A regressive tax approach is a straightforward way of levying taxes by the government, irrespective of the income earned. This is not levied depending on the income quantum; instead, a flat amount is charged from all, making it a convenient tax form for certain types of countries.
