# Regressive Tax

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).