Question

Write the following short notes with examples and graphics presentation.   

a) Progressive taxes and proportional taxes.

b) Regressive taxes and digressive taxes.

Answer 1

Progressive Taxation:

A progressive tax is a tax in which the tax rate increases as the taxable base amount increases.

The amount of tax paid will increase at a higher rate than the increase in tax base or income.

Progressive taxes are imposed to reduce the tax incidence of people in low income group as such taxes shift the incidence to those in a high income group. Thus, a progressive tax extracts an increasing proportion of rising income. In progressive taxation, tax rate is directly proportional to the income being taxed.

Example of Progressive Tax:

	Income	% of Income Paid in Tax	Amount of Tax
Family A	$ 10,000	10	$ 1,000
Family B	$20,000	20	$ 4,000
Family C	$ 30,000	30	$ 9,000
Family D	$ 40,000	40	$ 16,000

            Proportional Taxes:

Taxes in which the rate of tax remains constant, though the tax base changes, are called proportional taxes. A proportional tax is a tax imposed so that the tax rate is fixed, with no change as the taxable base amount increases or decreases. The amount of the tax is in proportion to the amount subject to taxation. In proportional taxation, marginal tax rate remains the same as average tax rate. It is also known as Flat Tax.

Example of Proportional Tax:

	Income	% of Income Paid in Tax	Amount of Tax
Family A	$ 10,000	20	$ 2,000
Family B	$20,000	20	$ 4,000
Family C	$ 30,000	20	$ 6,000
Family D	$ 40,000	20	$ 8,000

Regressive Taxes:

A regressive tax is a tax imposed in such a manner that the average tax rate decreases as the amount subject to tax increases. Low income group pays a higher amount of their income in taxes compared to high income group under a regressive tax because the government assesses tax as a percentage of value of the asset that a taxpayer purchases or owns. This type of tax has no correlation with an individual’s earnings or income level. This includes property tax, sales tax on goods and excise tax on consumables. There is an inverse relationship between the tax rate and the taxpayer’s ability to pay as measured by assets, consumption, or income.

Example of Regressive Tax:

	Income	% of Income Paid in Tax	Amount of Tax
Family A	$ 10,000	40	$ 4,000
Family B	$20,000	15	$ 3,000
Family C	$ 30,000	7	$ 2,100
Family D	$ 40,000	5	$ 2,000

Digressive Tax:

It is a mixture of progressive tax and proportional tax. According to the digressive tax, the tax rate in increases up to a certain level of income and after that, the tax rate is uniform. Digressive taxes are mildly progressive, hence not very steep, so that high income earners do not make a due sacrifice on the basis of equity. Thus, in digressive taxation, the tax payable increases only at a diminishing rate.

Example of Digressive Tax:

	Income	% of Income Paid in Tax	Amount of Tax
Family A	$ 10,000	10	$ 1,000
Family B	$20,000	20	$ 4,000
Family C	$ 30,000	30	$ 9,000
Family D	$ 40,000	30	$ 12,000