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Regressive Taxation

Definition of Regressive Tax:

Regressive tax is a type of tax that is applied uniformly to every (lower and higher) class of income individuals. Regressive tax system shifts the burden of tax disproportionately to the poor classes. It involves a type of taxation where every individual is charged equally irrespective of his level of income.

Regressive Taxation Example: Central and state taxation of cigarettes is considered Regressive where lower income classes pay higher rate of taxation in terms of their monthly income compared to their high income class counter parts. Sales tax on grocery products is also considered as regressive tax. This also includes taxes imposed on transport, housing and clothing.

Even lotteries are also considered as a form of regressive taxation. More than three crore people form the Rs.50,000 crore paper lottery market in India today.

Regressive Sales Tax rate and Calculator

In India VAT replaced sales tax on 1 April 2005. Due to the federal nature of the country the states do have the power to set their own VAT rate.

Regressive Taxation Example

Jewelry made from bullion and precious stones 1%
Majority of food grains and goods of national importance like iron and steel 4%
Standard rate goods 12.5%
As per the data given above if we compare two individual’s (A&B for example) income where a gets Rs.50, 000 per month and B gets 10,000 per month: the tax on food grains will be
Person a Rs.2000 and person B Rs.400. the 4% tax levied on both shows the demarcation which a regressive tax generates.

Difference Between Progressive and Regressive Tax:

Progressive taxation means that the tax paid by the individual raises as his income increases. And regressive taxation refers to a form of taxation where the tax paid by the person increases as his income decreases or a proportion of tax paid decreases as his income increases.

Income tax paid by an individual is considered as progressive tax. The higher is the income the more tax is to be paid by the individual.

Where as the taxes levied on groceries, housing and clothing are considered to be regressive.

Here there is a disproportion between the higher and the lower income class individuals. Lower income individuals mean the middle class and the poor. But for simple understanding “lower income individual” is referred in the context.