The term is frequently applied in reference to fixed taxes, where every person has to pay the same amount of money. The regressivity of a particular tax often depends on the propensity of the tax payers to engage in the taxed activity relative to their income. In other words, if the activity being taxed is more likely to be carried out by the poor and less likely to be carried out by the rich, then the tax may be considered regressive. To determine whether a tax is regressive, the income-elasticity of the good being taxed as well as the income-substitution effect must be considered. A simplified illustration of a regressive tax on income (proportional on consumption) is as follows: If Jane has $10 and John has $5, a tax of $1 on a purchase would result in a different percentage of total income applied to taxation, 20% for John and 10% for Jane. Thus, a tax that is fixed to the value of the good/service (without exemptions or rebates) would likely, in effect, result in a higher burden of taxation to people with less money (depending on consumption level and timeline examined - year or lifetime). A regressive tax system does not mean and likely would not result in low income earners paying more taxes than the wealthy, only that the effective tax rate relative to income or consumption would be a larger tax burden to low income earners.
As of 2004, the highest tax bracket in the United States is 35%, one of the lowest in the world; however, many American states levy their own income tax in addition to the federal rate and added with FICA taxes, which are also based on income, up to a certain threshold level. The combined tax burden can amount to half or near half of an individual's income. Opponents of regressive taxation state that a regressive tax effectively punishes the poor for being poor, placing a higher burden on those least able to bear that burden. Advocates would state that every person should be treated equally under tax law regardless of income and that progressive taxation amounts to class warfare, wealth envy, and Karl Marx communism with "From each according to his ability, to each according to his needs."
At least one critic in the United States has argued that progressive taxation is not what that nation’s founders intended. Dr. Burton W. Folsom at the Mackinac Center for Public Policy has written:
In the actual text of the two decisions in the Supreme Court case, Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, aff'd on reh'g, 158 U.S. 601 (1895), the Court did not mention the terms "regressive tax" or "progressive tax" and, whether the tax was progressive or not, there is no mention in the texts that the parties even raised the issue of the constitutionality of the 1894 income tax statute based on any theory about the tax being either progressive or regressive. The Court in Pollock ruled that the 1894 tax on income from property (e.g., rental income) should be treated as a direct tax (i.e., should be treated in the same way that a tax on the property by reason of ownership would be treated) and that, since the 1894 income tax was not apportioned among the states according to population, the tax was unconstitutional. The effect of that rule was indeed overturned by the Sixteenth Amendment in 1913.
Some payroll taxes, such as Social Security taxes in the United States, have been called regressive. The rate is 12.4% on an amount of income adjusted annually for inflation called the wage base (e.g., $94,200 for the year 2006, and $97,500 for 2007). Half of the tax is withheld from the employee's pay with the other half being paid by the employer. It has been argued, however, by economists such as Milton Friedman that the tax the employer pays is in fact also borne by the employee because the employee's wage becomes lower than it would otherwise be. Self-employed individuals pay the entire amount of applicable tax. However, whether this tax should properly be called regressive is disputed because under the benefit formula for computing retirement benefits, the benefit of those with higher lifetime earnings is proportionally lower compared to those with lower lifetime earnings. A recipient's lifetime earnings on which Social Security tax is withheld is indexed and averaged over the highest 35 years of earnings to obtain an Average Monthly Indexed Earnings amount (AIME). If Social Security benefits begin at a person's Normal Retirement Age (65 to 67, depending on year of birth), the monthly benefit in 2007 is 90% of the first $680 of AIME, 32% of AIME above $680 and less than $4100, and only 15% of AIME in excess of $4100. For example, an individual whose indexed earnings were at the poverty level of $10,200/year would receive 78.4% of that in benefits, while an average earner of $37,000/year would receive only 44.8% of that in benefits, and individual's with above average earnings receive an even lower proportion in benefits. Wages on which Social Security tax is not withheld, for example that amount earned in excess of the wage base or that of certain public employees, is not included when the AIME is computed and therefore does not increase a person's benefits.
A value-added tax or other sales tax on food and other essentials such as clothing, transport, and residential rents can be regressive. Since the income elasticity of demand of food is usually less than 1 (see Engel's law), it tends to take up a higher percentage of the budget of a person or family with a lower income. A poll tax is a fixed tax for each person: since each person pays the same amount of money, it is a lower proportion for people with higher incomes. Television licences that are implemented in many countries, especially in Europe, are considered regressive taxes and in most cases consist of a flat annual payment for the use of a television. Sin taxes are also criticized for being regressive, since the products taxed (usually alcohol and tobacco) are often consumed more (or at least to the same extent) by the lower classes.
Property taxes are often called regressive. Because the income elasticity of demand of housing is usually less than 1 and property taxes contribute to the cost of owning or renting housing, property taxes often consume a higher percentage of a lower income budget than they do for a higher income budget. The regressive aspects of property taxes are, however, disputed. Only a fraction of property is used for housing, with most of the value held in property being tied to agricultural, manufacturing, and office facilities. This is both due to the greater area used for non-residential purposes and the much greater value of the improvements often associated with the same.
And when only land value (as opposed to real estate value which is improvements plus land value), it is has never been disputed that ownership of land value is even more maldistributed than income. See Land Value Taxation. For example, in Baltimore City the top 10% of land owners (all corporations) in Baltimore, MD own just over 58% of the total land value, the bottom 10% of those who own any land at all account for less than 1% of the total land value. In Baltimore the homeownership rate is about 51% according to the Census Bureau, while few households have zero income.
High-income owners may also tend to own substantially (and disproportionately) more property, either directly or through companies in which they hold stock. High income owners also tend to own more industrial, retail, and office property than low-income earners, with this effect seen strongly in the finances of municipalities. Towns and cities with a large number of "ratables" (commercial property excluding rental housing) raise substantially more revenue than towns of equal wealth and size but fewer ratables. Thus, property taxation is arguably more often progressive in practice.
William H. Gates, Sr., the father of Microsoft co-founder Bill Gates, came to a different conclusion in a 2003 study of tax schemes California, Idaho, Oregon, and Washington, arguing that property taxes were regressive by one to three percent (depending on the state), between the lowest and highest income brackets.
The New York Times in June 2005 ran a high-profile campaign arguing that at the very-high incomes United States tax-payers actually face regressive taxation rates, equating income tax across wage and rental incomes. For instance, they project that if the Bush tax cuts are made permanent: “By 2015, those making between $80,000 and $400,000 will pay as much as 13.9 percentage points more of their income in federal taxes than those making more than $400,000.” In response to this, Gregory Mankiw has written to the editor of the New York Times, arguing that wealth condensation is a cyclical phenomenon and that tax rates should not be adjusted to stabilize the share of income going to the top 0.1 percent of earners in boom years and depressions. He closes with another recurring argument against progressive taxes: “If policy makers' primary goal is … economic prosperity for all, they should avoid focusing on the politics of envy.”