The rag being a turban and the head being that of a middle eastern or far eastern male. Although not all middle eastern or far eastern people wear turbans the term raghead is used in any case. It's the same as calling an Iraqi a Paki. See alse: towelhead, sand nigger, Paki, camel jockey, oil nigger.
Taxi Driver: Those damn armericans are always putting there noses where they shouldn't.
Taxi's Fare: Shut up yah fuckin raghead! What the fuck do you know anyway.