Progressive Tax vs Regressive Tax
Progressive Tax and Regressive Tax are two Market Failure & Government concepts in AP Economics that students often mix up. In short: progressive tax is a progressive tax is a tax system in which the tax rate increases as the taxpayer's income increases. Meanwhile, regressive tax is a regressive tax is a tax system in which the tax rate decreases as the taxpayer's income increases, placing a higher relative burden on lower-income individuals. Here is how they compare side by side.
A progressive tax is a tax system in which the tax rate increases as the taxpayer's income increases.
Higher-income individuals pay a larger percentage of their income in taxes than lower-income individuals. This reduces income inequality and is often used to fund social programs. The U.S. federal income tax is an example of a progressive tax structure.
A regressive tax is a tax system in which the tax rate decreases as the taxpayer's income increases, placing a higher relative burden on lower-income individuals.
Lower-income individuals pay a larger percentage of their income in taxes than higher-income individuals. Sales taxes are a common example because lower-income households spend a larger share of their income on taxed goods, and the Social Security payroll tax is regressive because earnings above a cap are not taxed. In both cases the effective tax rate (tax as a share of income) falls as income rises.