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