Question

Discuss what is meant by the terms progressive, regressive, and proportional as they relate to taxation. Give an example of a progressive tax and a regressive tax.

Answer 1

Under progressive taxation, the tax rate increases as the income of the taxpayers' increases. This means that higher-income earners pay at a higher level of tax rate and lower-income earners pay at a lower level of the tax rate.

Under the regressive tax system, the tax rate decreases as the income of the taxpayers' increase. This means that higher-income earners pay at a lower tax rate as compared to lower-income earners.

Under proportional taxation, the tax rate is set as the same for all income earners. This means that all the individuals earning any level of income pay at the same tax rate.

Example of progressive tax:

	Income	% of income paid in tax	Amount of tax
Individual A	$5,000	4%	$200
Individual B	$10,000	8%	$800
Individual C	$20,000	12%	$2,400

Here, under progressive taxation, as the income of the taxpayers' increases, the rate of taxation also increases.

Example of regressive tax:

	Income	% of income paid in tax	Amount of tax
Individual A	$4,000	12%	$480
Individual B	$8,000	8%	$640
Individual	$20,000	4%	$800

Here, under regressive taxation, as the income of the taxpayers' increases, the rate of taxation decreases.