What are the Pros and Cons of a Regressive Tax?

Advocates of sales, excise, and property taxes argue that these types of regressive tax are fundamentally more fair than other types of tax and that the use of such taxes may have a positive impact on the behavior of members of society. Opponents of this type of taxation focus on the issue of fairness as well, but define fairness differently, and generally believe that ability to pay should be the main standard used in assigning the burden of taxes, rather than consumption or ownership. Opponents of regressive taxes will also often assert that this type of tax encourages the stratification of society, thereby weakening the middle class.

A regressive tax falls most heavily, in percentage terms, on people with the least income. A sales tax is one very common regressive tax. People in higher income brackets tend to spend a smaller percentage of their income on purchases impacted by sales taxes and, therefore, pay a smaller overall percentage of their incomes in sales tax than do people in lower income brackets. Excise taxes, such as the gasoline tax, and property taxes are also regressive. Progressive taxes, on the other hand, fall more heavily on people with larger incomes.

One common argument used to support these types of taxes is that they are more fair. In this view, who buys what is less important than whether, in the case of sales tax, the tax falls equally on all purchases. Anyone who purchases a particular taxable item pays the same amount.

Another argument, often used to support regressive tax, is that such taxes foster desirable economic behavior. Excise taxes, such as taxes on cigarettes and alcohol, are meant to have an impact on behavior, and these taxes, together with the sales tax, may curb consumption of certain goods and services. In this fashion, they can be used to urge people to avoid dangerous behaviors but encourage savings, which are typically excluded from taxation under this sort of tax plan.

Opponents of regressive tax often share the conviction that fairness in taxation is important but define fairness differently than those who support them. They generally believe that it is more important to avoid imposing tax burdens that impose an undue hardship than to avoid imposing taxes at unequal rates. In this view, progressive taxes, which fall most heavily on people with the greatest ability to pay, are fairer, as they cause less economic hardship.

A further argument against any kind of regressive tax hinges on the importance of maintaining a strong middle class. Supporters of this position typically hold that tax policy should be designed to foster the growth of a middle class by making it relatively easy to rise into that class but relatively difficult to become tremendously wealthy. A regressive policy, they believe, leads to the opposite situation and makes it easier to leave the middle class in either direction.