There is a lot of talk these days about taxes…who will pay them, will they go up, by how much, etc.  A little perspective on how taxes affect people is in order.  What’s the difference between a progressive tax and a regressive tax?

We can spend a lot of time on definitions, but it’s easier to use a few examples:

Progressive tax:  As your income goes up, your tax rate goes up.  The idea is that you can afford to pay a higher tax rate if you make more money.  That’s why the bottom income tax rate is 0%, then 10%, then increases as you make more money.

Regressive tax:  Taxes such as gasoline taxes are regressive.  Most states, as well as the feds, tack on taxes to each gallon of gas.  Let’s say you pay $50 to fill up your gas tank (as I did yesterday).  About $10 of that was taxes.  Now, how much of that tax, in percentage terms, does that represent of your earnings?  If your neighbor makes $10/hour (about $20,000 per year), he just paid 1 hour’s work just for the taxes, or about 1/20 of a percent of his yearly earnings.  If your neighbor fills up once each week, with 2 weeks of vacation, he pays $500 per year  (50 weeks x $10) in gas taxes.  That’s 2.5% of his total income.  If you make $20/hour (about $40,000 a year), you paid the same amount, but you paid half as much in percentage terms as your neighbor, or about 1.25%.  Doesn’t seem fair, does it?  Whoa, there, you’re injecting some subjective judgment of fairness.  But ok.

This is why sales taxes and gas taxes are regressive…they hit the poor harder than they do the rich, in percentage terms.  Did you ever wonder why you don’t pay sales tax on bread, milk, cereal, and the like?  This is the local taxing authority trying to avoid a regressive sales tax and make the basic food group more affordable for the poor…you don’t pay tax to eat basics.  However, if you go to a restaurant and order a glass of milk, you will pay sales tax.  Why?  You can go to the grocery story and buy a gallon of milk for $2.50.  You might pay $2.50 for a glass of milk in the restaurant.  The city and the state say, hey, if you’re poor, don’t go out to dinner — buy your milk in the grocery store.  (OK, to be fair, the city and state really are saying that if you can afford to go out to dinner, rather than stay home, you can afford to pay tax on that transaction.)

The entire argument that we’re having regarding “95% of the taxpayers won’t pay one dime more in taxes” is all about progressive taxation.  The idea that the rich can more afford higher taxes than the poor is what it’s all about.  What they’re really arguing about is not “can” the rich pay more, but “is it fair” for the rich to pay more.

This blog is not about that “fairness” argument.  It’s about definitions.