An unfortunate aspect of living in Texas (or anywhere, really) is having to deal with all the myriad forms of taxation. From annual taxes like federal income tax to daily taxes like sales tax, the government finds numerous ways to take its cut.
Navigating tax law and all the various types of taxes can be confusing and frustrating. But understanding certain basic concepts about taxes goes a long way to demystifying the tax structure in this state and country. One of the more important categorizations of taxes is regressive vs. proportional vs. progressive taxes.
A regressive tax is any tax in which lower-income people pay a higher amount than higher-income people. That’s because a regressive tax simply adds an extra fee to a transaction or asset, taking no account of how much wealth the taxed person has.
The classic example of a regressive tax is a sales tax. When you buy an item, the same tax applies for anyone buying it. Other examples along the same lines are excise taxes on airfare or gasoline and property taxes. Regressive taxes have a larger impact on lower-income people.
Proportional taxes, also known as a “flat tax,” applies an equal tax rate to all people, no matter what their individual wealth is. Some states use a proportional tax system for their income taxes. So, if a proportional tax rate were 5%, a person making $10,000 would owe $500 and a person making $50,000 would owe $2,500.
Note the distinction between regressive and proportional – A more wealthy person does pay more than a less wealthy person, just at the same rate.
A progressive tax is one where the tax rate increases the more income or wealth a person has.
The federal income tax is the most prominent example of a progressive tax. With tax brackets of increasingly higher percentages and a standard deduction, people with lower incomes pay significantly less than those with higher incomes. The estate tax is another example of a progressive tax.
Any tax can be grouped into one of these three categories. And once you’ve identified a tax by its type, you’ll be able to understand how it impacts you based on your income and wealth.