Regressive tax
Topic: Taxation: Direct and Indirect Taxes, GST and Global Tax Issues · NCERT: Class 12, Ch 5 "Government Budget and the Economy"
Meaning
A regressive tax takes a larger share of income from poorer people than from richer people. Uniform taxes on consumption and a poll tax (the same amount from every person) are the main examples. Indirect taxes are generally regressive. The reason is that poor households spend almost all their income, while rich households save part of it. So the same tax rate on what people buy takes a bigger bite out of a poor family's income.
Example
Say a 5% tax falls on everything people buy. A family earning ₹10,000 that spends all of it pays ₹500 in tax, or 5% of its income. A family earning ₹1,00,000 that spends ₹50,000 pays ₹2,500, which is only 2.5% of its income.
Don't confuse with
- "Affects everyone equally": NCERT says indirect taxes are regressive because they "impact all income groups equally". That reason is wrong. They are regressive because they take a larger share of poor incomes.