Regressive Tax

by Obaidullah Jan, ACA, CFA

A regressive tax is a tax structure in which the effective tax rate decreases as the total income of the tax payer increases. The rich might pay a higher amount of tax, they pay less relative to their total income.

Regressive taxes are criticized because they do not follow the ability to pay principle and potentially result in increased income disparity. However, regressive taxes such as sales tax, result in consistent revenue for governments.

Regressive taxes are different than flat (or proportional taxes) and progressive taxes.


Barry Moore works as a transcriptionist in NC Hospital and earns $60,000 per annum. Rip Empson is a surgeon working in the same facility and earning $250,000. In 2013, the social security tax is payable at 6.2% only on the first $113,700 of the salary. Any excess over $113,7000 is exempt from social security tax.

Barry Moore's tax liability under the regime is $3,720 (6.2% of the $60,000). Since his total taxable income is below the ceiling for the social security tax, he pays tax on all of his income. He pays 6.2% of his total income as social security tax, which means his effective social security tax rate is 6.2%.

Rip Empson's social security tax liability and effective social security tax rate are calculated below:

Total income (A)$250,000
Social security tax is chargeable only on (B)$113,700
Exempt portion of income$136,300
Social security tax rate (C)6.2%
Social security tax liability (D = B × C)$7,049
Effective social security tax rate (D × A)2.82%

Barry has lower income and he pays 6.2% of his income as tax. Rip on the other hand, has higher income and pays a lower proportion of his total income (2.82%) as tax. This clearly tells the social security tax structure is regressive in nature.

Other examples of regressive tax structure include sales tax, tariff taxes, property taxes, etc.