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Updated August 5, 2020

What is a Regressive Tax?

A regressive tax is a tax that increases as a percentage of income as the amount of income declines.

How does a Regressive Tax work?

The United States has the opposite of a regressive tax system. That is, it has a progressive tax system, which means that different portions of a person’s or company’s income are taxed at increasing rates (that’s why the rates are often referred to as marginal rates).

For example, under a regressive tax system, the IRS might tax a single filer’s $100,000 income as follows:

The first $8,025 is taxed at 28% = $2,247
The next $24,525 is taxed at 25% = $6,131.25
The next $49,100 is taxed at 15% = $7,365
The final $18,350 is taxed at 10% = $1,835
Total tax owed: $17,578.25

But under a progressive tax system, the IRS might tax a single filer’s $100,000 income as follows:

The first $8,025 is taxed at 10% = $802.50
The next $24,525 is taxed at 15% = $3,678.75
The next $49,100 is taxed at 25% = $12,275.00
The final $18,350 is taxed at 28% = $5,138
Total tax owed: $21,894.25

As you can see, a regressive tax system requires a higher tax burden from lower income earners. A progressive tax system transfers that higher tax burden to higher income earners by taxing only the higher portions of income at a greater rate.

Why do Regressive Taxes matter?

In general discourse, it is important to know the difference between tax brackets and tax rates. Many people assume that when they’re in the 28% tax bracket, for example, that all of their income is being taxed at 28%, which is not the case. As our example shows, you can be in the 28% tax bracket but have a 21.89% effective tax rate on your income under a progressive tax system (or something higher than 21.89% under a regressive tax system).

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