Degressive Tax

Published Feb 8, 2023

Definition of Degressive Tax

A degressive tax is a tax system where the tax rate decreases as the taxable amount increases. In other words, as a taxpayer earns more income, a lower percentage of that income is taxed. This is in contrast to a progressive tax system where the tax rate increases as the taxable amount increases so that those with higher incomes pay a higher percentage of their income in taxes.

Degressive taxation aims to provide relief to taxpayers with lower incomes and can also be used to incentivize certain behaviors, such as investment in certain industries.

Example

To illustrate this, let’s look at the income tax system in the imaginary country of Zogonia. In Zogonia, the income tax rate is degressive, meaning that the tax rate decreases as the taxable income increases. For example, the tax rate for incomes between USD 20,000 and USD 50,000 is 18%. However, for incomes between USD 50,000 and USD 100,000, the tax rate is only 16%. Thus, people with a higher income actually pay a smaller share of their income in taxes than people with a lower income.

Why Degressive Tax Matters

Degressive taxes are relevant because they usually represent a compromise between a completely progressive tax system, which aims to tax higher-income earners at higher rates, and a completely flat tax system, which taxes all taxpayers at the same rate regardless of income. By reducing the tax rate for higher income earners, degressive taxes aim to provide some relief to those who may be facing a higher tax burden under a purely progressive system. Additionally, degressive taxes can incentivize certain behaviors, such as investment in certain industries, by reducing the tax burden on those who earn higher incomes.

However, degressive taxes can also be criticized for being regressive in their overall impact, as they can still result in lower-income taxpayers paying a larger portion of their income in taxes compared to higher-income taxpayers. As such, the use of degressive taxes remains a matter of debate among economists, policymakers, and political leaders.