Regressive Budget Types
In finance, the term "regressive" refers to the reduction of taxation rates in proportion to the increase in income levels. This means that low and middle income earners are subjected to high taxation rates whereas high income earners are subjected to lower taxation rates. This is in contrast to progressive taxation that increases the rate of taxation relative to the increase in income. A regressive budget, therefore, is based on the principle of raising budget income through the imposition of taxation rates that decrease with increase in income.
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The Relationship Between Taxation and Income Distribution
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When imposing taxation for funding the budget, a government can adopt regressive, progressive or flat taxation rates. Regressive taxation places less burden on the wealthy and a greater financial burden on those who are not wealthy. Progressive taxation systems place more burden on the wealthy. Flat taxation applies uniformly across all income segments. Regressive budget types prevail in circumstances where a government seeks to raise a significant portion of its budget income from consumption taxes or excise tax.
Consumption Taxes
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A consumption tax is the budget income generated from extra fees charged on products and services during sales and purchase transactions. Consumption taxes are regressive because the low income earners spend most of their income on consumption whereas the wealthy spend only a small portion of their income on consumption. Sales tax and value added tax are the two main categories of consumption taxes. Sales tax is imposed as a percentage of the total value of the goods or services at the point of distribution to the end users. Value added tax is imposed as a fixed percentage charged at a particular stage of product sale when value is added to raw materials.
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Excise Tax
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Excise taxes are extra fees levied to discourage use of commodities such as oil or items rated harmful by the government such as alcohol and cigarettes. Excise taxes can be effective because people generally avoid highly taxed products. This objective, however, exposes a government to the possibility of raising insufficient tax income for the budget because reduced consumer spending on a targeted range of products can translate to reduced income for the budget.
Implications of Regressive Budget Types
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Government budgets that portray regressive taxation attributes have generally attracted wide-ranging criticism. This is because regressive budget types tend to place the burden of taxation on the poor while favoring the wealthy. This means that a government must endeavor to strike a balance in the taxation system by applying lower rates of consumption taxes on basic necessities such as food and clothing and higher rates on luxury items. A government can also establish a less discriminatory system by combining taxation methods.
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