The US income tax is progressive, that is, the tax rate increases as your income goes up. The marginal tax rate, that is the tax you pay on the next dollar of income, increases at certain intervals of income. This results in the rich paying more in taxes. For example, in the US, the top 1% of the income earners pay 21% of all federal income taxes, and the top 50% of income earners pay 97% of all income taxes. Summary of the Latest Federal Income Tax Data, 2020 Update (taxfoundation.org).
That’s a progressive tax, but what is a ‘regressive’ tax? The definition of a regressive tax is one where lower income taxpayers pay a higher percentage of their income towards the tax than higher income taxpayers. A good example of a purely regressive tax is the social security tax, where the tax rate explicitly decreases (to zero) at an income cutoff. The more you earn, the less of this tax you pay as a proportion of your income.
But what about a flat tax? Everybody pays the same flat percentage. Fair right? Let’s take for example, sales tax, which is a ‘flat’ tax.
Compare a family making $50k/year to a family making $150k/year. They’ve got to eat. Imagine that the wealthier family has fancy tastes, and spends about twice as much on food as the poorer family. The lower income family pays $10k/year, the higher income family pays $20k/year. Sales tax is a flat 6%.
This results in a total sales tax bill of $600 and $1200 respectively. Fair right? The rich family paid twice as much. True, but they paid 0.8% of their income, while the poorer family paid 1.2% of their income towards the tax. In this example, the lower your income, the higher the percentage of that income you pay in sales taxes on food. That’s regressive.
This is why many states exempt or provide a lower tax rate for food and essential items, to make the sales tax less regressive.
Speeding tickets are another good example. Speeding fines scale with speed, not income. To a wealthy banker, even a $200 speeding ticket is just an annoyance, but to a struggling single mother, this might represent a significant fraction of her weekly income. Similarly with other fines and fees.
What about property taxes? Are they regressive?
Property taxes are a flat tax. Property owners pay a fixed percentage of the assessed value of their property every year. The means of calculating the assessment and the percentage are legion and byzantine, but in the end, it’s just a flat tax on the value of the property you own.
Maybe this flat tax is fair? Again, everybody pays the same percentage on their property value. But, property value is not the same as income. The top 20% of the income strata spend 30% of their income on housing, while the bottom 20% spend 40% of their income on housing.
https://www.businessinsider.com/how-high-income-and-low-income-americans-spend-their-money-2017-3
So even though the highest and lowest income segments pay the same percentage property tax, the lower income taxpayers pay a higher percentage of their income. That’s regressive.
Illinois’ income tax is a flat 4.95%. Everybody pays the same rate, and it’s based on directly income. So while it’s not a regressive tax, it isn’t progressive either.
Enter the ‘Fair Tax’, which is marketing lingo for a progressive Illinois state income tax. This was a relatively simple change to the Illinois constitution to allow progressive marginal state income tax rates. Currently the Illinois constitution mandates a flat income tax, and will continue to for some time, as the Fair Tax referendum failed.
Why does it matter if a tax is regressive or progressive? Ideally if you are paying for progressive programs with taxes, it’s best if those who can afford to pay, do pay, and pay the most. This is best done with a progressive tax. If you fund progressive programs with regressive taxes, those taxes disproportionately impact those who are most likely to use those same programs.
Think about it this way, progressive interventions are frequently called ‘income redistribution’, sending money from the haves, to the have nots. Funding progressive initiatives with regressive taxes is sending money from the have nots, to the have nots. That doesn’t make much sense.
