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Would a tax on prescription drugs be more likely to be progressive or regressive and why?

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yaga49 | (Level 1) Valedictorian

Posted May 3, 2013 at 5:31 PM via web

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Would a tax on prescription drugs be more likely to be progressive or regressive and why?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 3, 2013 at 7:58 PM (Answer #2)

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To answer this question, let us first look at the definition of a progressive tax as opposed to a regressive tax.  A progressive tax is one in which a person with a higher income pays a higher percentage of that income in taxes.  This does not just mean that they pay more dollars.  Instead, it means that they pay a higher percentage of their income.  A regressive tax is the opposite.  In such a tax, a poorer person pays a higher percentage of their income in taxes than a richer person.

With that in mind, we can see that a tax on prescription drugs would most likely to regressive.  The reason for this is that poorer people are likely to spend a higher proportion of their income on prescription drugs.  When a person gets more money, they are not likely to start to consume a great deal more prescription drugs than when they had less money.  If my income doubles, I am not likely to consume twice as many prescription drugs as before. 

Let us look at an example.  Say Person A has an income of $50,000 and spends $1,000 per year on prescription drugs.  Now let us say that Person B has an income of $500,000 per year.  In order for the tax on prescription drugs to be progressive, Person B would have to spend more than $10,000 per year on prescription drugs.  This could happen, but it is not likely to happen just because Person B is older.

For the most part, people’s use of prescription drugs does not rise as rapidly as their income.  Therefore, richer people tend to spend a lower percentage of their income on such drugs.  That means that a tax on such drugs would be regressive. 

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