All tax schemes can be characterized as either progressive or regressive. Progressive taxes require those with higher incomes to pay a higher percentage of their income on those particular taxes. The impact of regressive taxes is exactly the opposite: they require those with lower incomes to pay a higher percentage of their income on such taxes.
Most income tax schemes are progressive because they usually rely on graduated rates which increase the percentage of income paid as income rises. In contrast property and sales taxes tend to be regressive in nature by virtue of the fact that they make everybody pay the same flat rate.
But if everybody pays the same flat rate shouldn't such taxes be considered neutral, neither progressive nor regressive? The key to understanding these concepts is to focus exclusively on the percentage of one's income that is paid for each type of tax. A look at how the numbers work in these tax schemes helps illustrate the concepts of progressive and regressive taxes.
The next two tabs illustrate progressive and regressive taxation schemes. First we review the federal income tax rates for 2005. Then we examine a hypothetical example of sales taxes paid on a flat screen television set.