Question

1. Write short notes on:

i) Progressive Taxes

ii) Regressive taxes

iii) Proportional taxes

iv) Real GDP

Answer 1

i)

Progressive Taxes refers to the taxes for which % of income that is paid in taxes rises with increase in income of the person. It is based on the Ability to Pay Principle of Taxation and a low rate is imposed on people who earn less as compared to the high tax rate which is imposed on the high earning people. It is believed that poor people marginal propensity to consume is high and they spend higher proportion of their income on goods. So, a low tax rate on poor is always beneficial to the economy in terms of boosting the demand.

ii)

Regressive Taxes refers to the taxes for which % of income that is paid in taxes falls with increase in income of the person.

Under this, the poor people have to pay larger amount of their income in taxes as compared to richer population. No correlation exists between individual earnings and tax rate.

iii)

Proportional taxes refers to the taxes for which a same tax rate is imposed on all residents regardless of their income. It is also referred to as Flat Tax System. It is imposed with the idea maintaining the equality between marginal and average tax rate.

Per-capital tax, occupational tax are some examples

iv)

Real GDP is the real value of all goods and services produced in the economy in a given year. Real implies that this measure of income is adjusted for inflation. It measures the volume of output at CONSTANT PRICES.

It can be calculated by using below formula:

Real GDP = Nominal GDP / GDP Deflator

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