A regressive tax takes a larger percentage of income from people who earn less

A regressive tax is one where the tax rate goes down as your income goes up. This means a person earning $30,000 a year pays a higher percentage of their income in tax than a person earning $300,000. The opposite of this is a progressive tax, where higher earners pay a higher percentage. Most people think of the income tax as progressive — and the federal income tax is — but many taxes in daily life are regressive.

The key word is percentage, not dollar amount. A wealthy person might pay more dollars in a regressive tax, but they pay a smaller slice of what they earn. A low-income person pays fewer dollars but a larger slice. Over time, this compounds: regressive taxes reduce the spending power of lower-income households more than they reduce the spending power of higher-income households.

Key Takeaways

  • A regressive tax takes a higher percentage of income from lower earners than from higher earners, even though higher earners may pay more in total dollars.
  • Sales tax and excise tax are the most common regressive taxes because everyone pays the same rate regardless of income.
  • Payroll tax (Social Security and Medicare) is regressive because it only applies to wages up to a certain cap, meaning high earners pay a smaller percentage of total income.
  • Property tax can be regressive in some areas because lower-income homeowners often pay a higher percentage of their income toward property taxes than wealthy homeowners do.

Sales tax and excise tax hit lower earners hardest

Sales tax is the clearest example of a regressive tax. Every state that has sales tax charges the same percentage to everyone — typically between 4% and 10% depending on the state and what you buy. A person making $25,000 a year spends most of their income on taxable goods like groceries, clothing, and gas. A person making $250,000 a year spends a much smaller percentage of their income on these items; the rest goes to savings, investments, or non-taxable services.

Excise tax works the same way. An excise tax is a tax on specific items — cigarettes, alcohol, gasoline, or airline tickets. The tax is the same per unit or per gallon for everyone. A low-income person who buys a pack of cigarettes pays the same excise tax as a high-income person, but that tax represents a larger bite out of their weekly budget.

Payroll tax is regressive because of the wage cap

Payroll tax — the money taken from your paycheck for Social Security and Medicare — is regressive, but not in an obvious way. The tax rate itself is flat: 6.2% for Social Security and 1.45% for Medicare (your employer pays an equal amount). The regressivity comes from the wage cap. In 2024, Social Security tax only applies to the first $168,600 of your wages. Anything you earn above that is not taxed for Social Security.

This means a person earning $50,000 pays Social Security tax on 100% of their income. A person earning $500,000 pays Social Security tax on only about 34% of their income. The higher earner pays more in total dollars, but a much smaller percentage of their total earnings goes to Social Security tax. Medicare has no wage cap, so it is less regressive than Social Security, but it still takes a smaller percentage from high earners because they have more non-wage income (investments, capital gains) that is not subject to Medicare tax.

Property tax can be regressive depending on local assessment practices

Property tax regressivity depends on where you live and how your local government assesses home values. In some areas, property tax is roughly proportional to income — higher-value homes pay higher taxes, and higher-value homes tend to belong to higher-income people. In other areas, property tax becomes regressive because lower-income homeowners live in older neighborhoods where homes have not appreciated as much, yet they still pay a significant percentage of their income toward property taxes.

The regressivity also shows up in rental housing. Renters do not pay property tax directly, but landlords pass the cost along in rent. A low-income renter may pay 40% or more of their income toward rent (which includes the landlord's property tax), while a high-income homeowner with a paid-off house might pay 10% of their income toward property tax. The same tax burden falls much harder on the person with less income.

How regressive taxes compare to progressive and flat taxes

The federal income tax is progressive: tax rates increase as income increases. In 2024, a single filer pays 10% on income up to $11,600, then 12% on income from $11,601 to $47,150, and so on up to 37% on income over $578,100. A person earning $50,000 pays an average rate of about 7%, while a person earning $500,000 pays an average rate of about 24%. Higher earners pay a higher percentage.

A flat tax would charge everyone the same percentage — say, 15% — regardless of income. This sounds neutral, but it is actually regressive in effect because the same percentage takes more from someone with less money. A flat 15% tax on $30,000 is $4,500; a flat 15% tax on $300,000 is $45,000. The high earner pays 10 times as much in dollars but the same percentage. The low earner loses a larger share of their ability to pay for food, housing, and other necessities.

Why governments use regressive taxes despite their impact

Regressive taxes are common because they are straightforward to collect and hard to avoid. Sales tax is collected at the point of sale by thousands of retailers. Excise tax is built into the price of fuel and cigarettes. Payroll tax is automatically deducted from paychecks. No one has to file paperwork or prove anything. The government gets steady revenue with minimal administration.

Regressive taxes are also politically easier to pass than progressive taxes. A sales tax increase affects everyone visibly, but it does not single out any group. An income tax increase on high earners faces organized opposition. Some states and cities have shifted toward regressive taxes (sales tax, excise tax) and away from progressive taxes (income tax) over the past 30 years, partly because they are simpler to administer and partly because they face less political resistance.

How to account for regressive taxes in your budget

If you are on a lower or middle income, regressive taxes take a larger share of your earnings than they do from higher earners. This means your actual take-home pay is smaller than the headline tax rate suggests. When you budget, account for sales tax on purchases — in most states, the price tag does not include it. Factor in excise taxes on fuel and other items. If you are self-employed, remember that you pay both the employee and employer portions of payroll tax (15.3% combined for Social Security and Medicare), which is higher than what a W-2 employee pays.

Understanding which taxes are regressive can also help you make spending decisions. Money spent on taxable goods (subject to sales tax) leaves your pocket twice — once for the item and once for the tax. Money spent on non-taxable services or saved and invested may preserve more of your income. This is not a reason to avoid necessary purchases, but it is useful context for understanding where your money goes.

Frequently Asked Questions

Is income tax regressive or progressive?

Federal income tax is progressive: higher earners pay a higher percentage of their income. However, some state income taxes are flatter, and when combined with regressive taxes like sales tax, the overall tax burden can be regressive for lower earners in some states.

Why is Social Security tax regressive if everyone pays the same rate?

Because of the wage cap. Social Security tax only applies to wages up to $168,600 (in 2024). A person earning $50,000 pays on 100% of their income. A person earning $500,000 pays on only 34% of their income. Same rate, but different percentages of total earnings.

Does a regressive tax mean poor people pay more in total dollars?

No. A regressive tax means poor people pay a higher percentage of their income, not necessarily more dollars. A wealthy person might pay $5,000 in sales tax (lower percentage of their income), while a low-income person pays $500 (higher percentage of their income).

Can a tax be both regressive and progressive at the same time?

Not in the same way. A single tax is either regressive, progressive, or flat. However, a tax system as a whole can be progressive overall if progressive taxes (like income tax) outweigh regressive taxes (like sales tax).