What is a regressive tax?

A regressive tax is characterized by a tax structure that decreases in percentage of income as an individual's income increases. This means that lower-income individuals pay a higher percentage of their income in taxes compared to higher-income individuals. For example, if a sales tax is imposed at a flat rate, it takes a larger share of a low-income person's earnings than it does from someone with a higher income, as the former has a smaller base to work from.

Understanding this concept is important as it highlights issues of equity and fairness in tax policy. It illustrates how certain tax structures can disproportionately impact those at the lower end of the income spectrum, leading to discussions about the social implications of tax systems and the potential need for progressive taxation, where higher earners pay a higher percentage of their income in taxes.