Understanding Regressive Tax

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Regressive tariff or tax is a system in which the tax percentage decreases with increasing income. Taxpayers with higher incomes must pay a lower percentage of their income. This is the case if the tax is limited by the absolute maximum or cap. A regressive tax proportionally represents a smaller portion of your income with the more you earn.

The Danish tax system is generally progressive as one pays proportionately the more they earn, between the lower tax bracket and top tax bracket. An example of a regressive tax is a head tax, which is a fixed amount charged per person and it is a percentage in greater proportion of one’s income.

Regressive tax is applicable to particular taxes or to the entire tax system on an annual or lifetime basis. The objective of the tax is to bring down the tax incidence of well to do individuals, by switching the incidence to those with modest incomes.

The reverse of a regressive tax relates to a progressive tax, with which the tax rate rises in tandem with the taxed amount. While a flat or proportional tax, comes with a fixed tax rate even when the taxed amount appreciates.

The regressivity of a given tax usually hinges on the proclivity of the tax payers to conduct the tax process applicable to their income. As such, whenever the taxed activity is more likely to involve the poor and unlikely to be actioned by the affluent, the tax can be regarded as regressive. To ascertain the regressivity of a tax, the income elasticity of the item being taxed and the income substitution elements are taken into account.

A regressive tax is often known in the United Kingdom and the United States as the payroll tax, although the payroll tax was created as a social contribution. Since it is withheld on the one hand with the income tax and on the other, volume of supply.

This type of use produces more than one financing as far as social welfare goes. Since the payroll tax is collected at a fixed rate on the income and only employees pay the tax, it serves as an example of a regressive tax.

In Germany and Austria, there is no regressive income tax rates, however, this results regressive effects as regards social security contribution limits. In the U.S, Delaware companies remit a regressive state income tax.

Value added tax (VAT) and other sales tax levied on basic essentials which include food, transport, and and residential rents may be regressive. Due to the fact that the income elasticity of demand in respect of food is often no more than one (according to Engel’s law), and takes up a much larger percentage of a lower income household’s budget.

Sin taxes are also blamed for constituting regressive taxes, because the items which normally include alcohol and tobacco are to a great extent consumed by the less affluent classes.

 

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