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There has been a lot of talk in the media in recent months about such-and-such a government policy being 'progressive' or 'regressive'. There is rarely any mention of what these terms actually mean, and you do see them being used incorrectly. So I thought I'd explain.

Strictly speaking, these terms are used to refer to taxation only.

The gentleman in my userpic wrote in his work 'The Wealth of Nations' that "The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state." This is what is known as 'proportional' taxation - broadly speaking, someone (let's call him Wayne) who earns twice as much as his neighbour (let's call him Dimitar) should pay twice as much in tax.

Now if we had a tax system in which Wayne paid more than twice as much in tax as Dimitar, then that would be a 'progressive' tax system. If Wayne paid less than twice as much in tax as Dimitar, then the tax system would be 'regressive'.

These terms can apply to the whole range of taxes, or to an individual tax. Let's consider which taxes in the UK are progressive or regressive...

In the UK income tax is levied at different rates on different levels of income. People pay 0% on the first £6,475 of income (the personal allowance, and there is no personal allowance for people earning more than £100,000 a year), 20% for the next £37,400 of income, 40% for the next £112,600 and 50% for anything over that. UK income tax is therefore clearly a progressive tax.

Inheritance tax is only levied on estates worth more than £325,000, so that would generally be held to be progressive. You could argue that a poor son who inherits his rich father's estate pays more inheritance tax than the rich son who inherits his poor father's estate, but since the poor son won't be poor any more, I think that's a pretty weak argument.

Capital gains tax only applies if you make gains of more than £11,100 in a year - so that's also progressive.

In fact, most current UK taxes are progressive. An example of a regressive UK tax would be the television licence, since everyone (give or take OAPs and some other groups) pays a flat rate. A flat rate tax means that although everyone pays the same amount, that amount is a higher percentage of income for lower earners, i.e. regressive.

With some taxes, it is hard to determine whether they are progressive, proportional or regressive. This is particularly true of many 'indirect' taxes - taxes on expenditure. Consider the duty you pay on a packet of cigarettes. Everyone pays the same duty, regardless of income, but since poor people generally smoke more than rich people, they'll pay more tax in absolute terms and a much higher percentage of their income. So tobacco taxes are regressive.

What about VAT? You might think that VAT is proportional since everyone pays 17.5% (or 20% from next year). But not everything you spend money on is subject to VAT. Some goods and services are exempt from VAT, some are subject to VAT at a rate of 0%, some at a rate of 5%. 'Essentials' like most food* and children's clothing are zero-rated, while most luxuries are subject to the full rate. That would suggest that VAT is progressive, since poorer people will spend more of their income on 'essentials'. On the other hand, richer people might spend more of their income on buying a big house, and that would be exempt from VAT.

I have seen two uses of 'progressive' and 'regressive' recently that confuse the issue somewhat.

The first is the use of the terms to describe not just taxation, but the whole package of taxation and benefits. The second is the use of the terms to describe changes in taxation and benefits as either 'progressive' or 'regressive'. So you may see some commentators arguing that the increase in VAT is 'regressive' or the public sector spending cuts are 'regressive'. Since 'regressive' and 'progressive' should strictly be used to describe a) just taxation and b) a position at a point in time, then neither of these statements is correct.**

It might be appropriate to describe a change to taxation policy as more or less progressive if that tax is progressive. For example, since we have established that income tax in this country is progressive, then abolishing the top rate would be 'less progressive', but to call it 'regressive' when income tax would still be very much progressive, would be misleading.

Part of the problem I think lies in the words used. 'Progressive' sounds like a good word and 'regressive' sounds like a bad word. Naturally, politicians want to be described with good words. Which MP wants to be called 'regressive'? Yet these terms are simply mathematical functions. There is no moral value intrinsic to the words. You'll note that at no point in this article have I used the word 'fair' (until now). Adam Smith would have argued that proportional tax was fair (although he probably wouldn't have used that word). Some of the bloggers and article writers this week have argued that the spending cuts are not 'fair' because they are 'regressive'**. I make no comment on fairness, but it's worth reiterating my point about the UK tax system still being progressive.

* You may remember the famous jaffa cake case in which the VAT treatment of jaffa cakes hinged on whether they were a cake (zero-rated) or a 'chocolate-covered biscuit' (standard rated).

** Once you start to include benefits and consider movements rather than the current position, then you can get some awkward effects in terms of 'progressive' and 'regressive'. Consider this: let's imagine that an alien squillionaire decides to give the poorest people in the country lots of money. Fantastic. The country is richer (because the money was a donation from Alpha Centauri). The country is also more equal (since the money went to the poorest in the country). Everybody's happy. But if you consider the whole tax / benefits system and you use the terms progressive and regressive to refer to the change rather than the current position, then that is 'regressive' (because you've reduced spending on benefits) and therefore 'unfair'. It's a silly example, but it demonstrates the point.



( 8 comments — Leave a comment )
Oct. 23rd, 2010 08:15 pm (UTC)
Am enjoying your posts. Feel happy that I had more or less understood the terms, but had not thought about the distinction between "less progressive" and "regressive" before.

Are you sure about the jaffa cakes? My memory was that cakes were (Monty Python) LOOXury and therefore standard-rated, whereas biscuits were (rather wonderfully) an essential and therefore zero. (I also believe that at the time women's sanitary products were (are?) considered non-essential and thus subject to standard VAT rate - you've got to wonder about the thought-processes that came up with that particular decision!)

Oct. 23rd, 2010 08:25 pm (UTC)
And I think that M&S got into trouble with tea-cakes on this point...
Oct. 23rd, 2010 11:10 pm (UTC)
You maybe right. Hang on, I'll check...

OK, I can't be bothered to look up the actual court case, but wikipedia has it the way I said:

Edited at 2010-10-23 11:12 pm (UTC)
Oct. 24th, 2010 07:07 am (UTC)
OK, see what you mean. Had not appreciated the decisive role played by the chocolate - so chocolate-covered cakes are essential but chocolate-covered biscuits are looxuries? Strange! - N.
Oct. 24th, 2010 10:44 am (UTC)
Her Majesty's Revenue & Customs moves in mysterious ways...
Oct. 24th, 2010 03:25 pm (UTC)
Not directly related to Jaffa cakes, but when VAT was being introduced / changed, there was a promise to not have it on "the working man's fish and chips". This gave Customs & Excise immense headaches to implement.
Oct. 23rd, 2010 10:39 pm (UTC)
Thank you for another illuminating post!
Dec. 8th, 2010 04:21 pm (UTC)
I think the whole biscuit/cake debate was solved by what happpens when you leave them out to go stale. Stale cake goes hard, stale biscuits go soft.

Mmmmmmm, cake......
( 8 comments — Leave a comment )