Costs and Benefits of a Regressive Tax System

A regressive tax, according to Investopedia, is a tax that places a greater tax percentage burden on the less-wealthy than on the wealthy. An officially regressive tax system is uncommon in real life. However, a flat tax, or a tax where every person pays a uniform percentage, is often considered a de facto regressive tax. A sales tax, therefore, would be regressive tax because both wealthy citizens and poor citizens pay the same percentage tax on all purchases.

One potential benefit of a regressive tax is that it frees up additional funds among wealthy citizens to allow for more job creation, investment, research and innovation. A key argument for a regressive tax is that a progressive tax, which places a greater burden on the wealthy, limits economic growth by burdening job creators. Those who are more skilled and knowledgeable about the economy, commerce, job creation, and how to stimulate growth should be given additional freedom to do so, not be “punished” with additional taxes for their successes.

A second potential benefit of a regressive flat tax is that it is simple: Everyone pays a uniform percent, regardless of ascribed status, level of income, or amount of accumulated wealth. This prevents many complications and reduces complexity, especially since progressive tax systems often have different tax rates for different types of income. Charging a flat 15 percent tax on all annual income would make it far easier for the government to determine the amount of tax owed and would thereby streamline tax collection.

Third, a regressive flat tax is often seen by more fair, especially by fiscal conservatives. A flat tax, which charges the same percentage of tax to everyone, ascribes no favoritism. Those with less income are not given preferential treatment in terms of taxes. You are not penalized for doing well at your job and getting pay raises.

Costs however, are also prevalent when it comes to regressive taxes.

First, a regressive tax brings in less revenue than a progressive tax. Because the top earners are not taxed at a higher percentage the government is missing out on considerable potential revenue. Additionally, since top earners are more likely to increase their own income, as reported by ABC News, this effect is compounded. Growing income inequality, especially in the United States, makes a flat tax far less effective than a progressive tax. If the rich get richer, the rich should be taxed more.

Secondly, a regressive tax is often accused of unfairly penalizing the poor. Though a rich person can easily handle his or her tax burden and have plenty of income left over, a poor person may have little or no disposal income left after taxes. As a result, a flat tax effectively reduces the quality of life of poor citizens.. 

Third, a regressive tax can harm the economy by reducing the smooth flow of money through consumer markets. If citizens with low income are unable to make consumer purchases due to a high tax burden, then the economy will be weakened as only the wealthy, a much smaller percentage of the population, can afford to consume non-essential goods.

Citizens with high income, even under progressive tax systems, will always have enough disposable income to continue making consumer purchases. Therefore, to ensure that a maximum number of citizens are consuming and stimulating the economy, a progressive tax, rather than a regressive tax, is needed.