Title: Regressive Tax Definition & Example | InvestingAnswers
Headings: Regressive Tax
Regressive Tax
What is a Regressive Tax?
How does a Regressive Tax work?
Why do Regressive Taxes matter?
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Content: 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.