A regressive tax is one that increases taxation progressively across the income range covered by the tax regime. A progressive tax, on the other hand, imposes a higher rate of taxation on high-income levels, on the supposition that high-income individuals can afford to pay higher taxes. Progressive taxes also include property taxes on real estate, personal belongings, and gas/airfare taxes. A proportional amount of the income and value added to each individual’s income is deducted in order to reduce the corporate rate. In a pure regressive tax system, taxes are levied primarily on production, with little if any reliance on consumption or income.
The most common types of progressive tax systems are the progressive tax brackets and the traditional tax system. In the progressive tax system, income is taxed according to how much it increases after the basic threshold amount. This could be through wages, salaries, inheritances, or dividends, depending on your filing status. There are special circumstances, however, in which you may be able to bypass this tax altogether through the use of non-refundable tax credits.
In a traditional regressive tax regime, individuals and corporations both start out with a set amount for income and then additional amounts are paid for property and vehicle purchases. Most states have property and vehicle tax rates at six percent and seven percent, respectively. The remaining portion of your income is either taxed directly or indirectly through sales taxes, like most states do.
In addition to income taxes, there are several other types of indirect taxes. Indirect taxes are based on how much your activity cost the country in terms of direct tax revenue and indirect tax savings. Some examples include gas/oil tax, amusement tax, vehicle registration tax, and food tax. These are in addition to direct taxes. If you’re not sure what kind of indirect tax you’re paying, ask an accountant or tax professional for their opinion.
A proportional tax system is regressive in nature. Because the rate starts off very high and gradually lowers, the lower end of the income spectrum are never taxed as high as the middle or top end. For instance, a twenty percent rate on wages means that someone earning twenty thousand dollars a year would have to pay thirty thousand dollars in income taxes if they did not have a charitable retirement account. While this sounds like a pretty hefty amount, the fact is that the same person would only have to pay ten percent in sales tax and property tax.
Another way to structure your tax bill is to make some changes in your tax calculations. Adjusting your withholding will slightly increase your taxable income, but the resulting effect on your taxes is minor. Adjusting your estimated withholding by a larger percentage will mean that you will owe less in taxes. You can do this by reducing your estimated earnings, increasing your annual return of exemption, or increasing your annual tax credit.