Question

Suppose there is a poll tax of \(\$ 2\) per head. How is this a regressive tax?

Short answer

A poll tax of \(\$2\) per person is a regressive tax because the tax burden decreases as income increases. For example, the tax rate for an individual with an income of \(\$10,000\) is \(0.02\%\), while the tax rate for an individual with an income of \(\$100,000\) is only \(0.002\%\). The effective tax rate decreases as income increases, making this poll tax a regressive tax.

Step-by-step solution

Define the poll tax

A poll tax is a flat tax amount that each individual must pay, regardless of their income. In this case, the poll tax is \(\$2\) per person.

Calculate tax burden on individuals with different incomes

Examine two individuals, one with an income of \(\$10,000\) and the other with an income of \(\$100,000\). For each person, calculate the tax rate by dividing the poll tax by their respective income: Individual A: Tax rate = \(\frac{Poll Tax}{Income}\) = \(\frac{\$2}{\$10,000}\) Individual B: Tax rate = \(\frac{Poll Tax}{Income}\) = \(\frac{\$2}{\$100,000}\)

Compare the tax burdens

Now compare the tax rates of these two individuals: Individual A: Tax rate = \(\frac{2}{10000}\) = \(0.0002\) or \(0.02\%\) Individual B: Tax rate = \(\frac{2}{100000}\) = \(0.00002\) or \(0.002\%\) The tax rate of Individual A, who has a lower income, is higher than that of Individual B, who has a higher income. This demonstrates that the poll tax is a regressive tax, as the effective tax rate decreases as the income of the taxpayer increases.

Key concepts

Poll Tax

A poll tax, often referred to as a head tax or per capita tax, is a fixed amount levied on each individual within a jurisdiction, without reference to income or resources. For example, if the law stipulates a poll tax of \(\$2\), each person would be required to pay this exact amount.

Let's illustrate this with an example provided in the textbook exercise. In a situation where a poll tax of \(\$2\) is implemented, both a billionaire and a minimum wage worker must pay this fixed amount. It is a straightforward system, easy to calculate and collect, but it does not consider the varying capacity of individuals to pay.

Why Is It Regressive?

The poll tax is inherently regressive because it imposes a heavier relative burden on those with lower incomes. If you earn \(\$10,000\) a year, \(\$2\) represents a more significant portion of your income compared to someone who earns \(\$100,000\). The inability of the poll tax to adjust to the taxpayers' financial situation often renders it unfair, particularly to those least able to afford it.

Tax Burden

The term 'tax burden' conveys the actual economic weight that a taxpayer bears due to taxation. It is not just the amount paid, but it also considers the taxpayer's ability to pay.

For instance, let's apply this to a poll tax scenario. Though the \(\$2\) tax might seem minimal, the burden it places on someone with a lower income is much heavier than on someone with a higher income.

Measuring Tax Burden

To measure the tax burden, one can examine the proportion of the tax to the taxpayer's income. For a person earning \(\$10,000\), a \(\$2\) poll tax might be a noticeable expense, while for a person earning \(\$100,000\), it might be negligible. Hence, the tax burden, in terms of impact on financial well-being, varies greatly across different income brackets.

Effective Tax Rate

The effective tax rate is a more precise measure of someone's tax burden. It is the average rate at which an individual or corporation is taxed, calculated by dividing the total taxes paid by the total taxable income.

Considering our example with a \(\$2\) poll tax, the effective tax rate for individuals with different incomes can be starkly contrasting. If the tax is \(\$2\), an individual with an income of \(\$10,000\) has an effective tax rate of 0.02%, while the effective tax rate for an individual earning \(\$100,000\) is just 0.002%.

Relevance to Regressive Tax

This discrepancy highlights the regressive nature of the tax: as income increases, the fraction of income paid as tax decreases. The effective tax rate, in this case, is an important tool for understanding the real impact of taxes on individuals at different income levels and the regressive nature of certain tax policies.