Regressive Tax

A tax can be regressive even if everyone pays the same rate. This happens because lower-income households typically spend a larger proportion of their income on the goods and services being taxed.

For example, a tax of 1 on every litre of fuel costs a household earning 20,000 and a household earning 100,000 roughly the same amount if they buy similar quantities. But that tax represents a much larger share of the lower-income household's earnings.

Sales taxes, value-added taxes and excise duties on goods such as tobacco, alcohol and fuel are often considered regressive, because poorer households spend more of their income on consumption, while wealthier households save more. Fixed charges that are the same for everyone, such as some licence fees, are also regressive.

Governments sometimes reduce the regressive effects of such taxes by exempting or applying lower rates to essentials such as food and children's clothing, or by providing benefits or tax credits to lower-income households. Regressive taxes are the opposite of progressive taxes.