Question

In: Finance

Describe regressive, proportional, and progressive financing. Explain how each of the following is regressive, proportional, or...

Describe regressive, proportional, and progressive financing. Explain how each of the following is regressive, proportional, or progressive

Solutions

Expert Solution

1. Regressive tax : Tax paid (as proportion of income) decreases as income increases

Example: A country where everyone needs to pay tax of 2000. In this case, tax rate of people earning low is higher than people earning more.

"Regressive" here means the distribution effect on expenditure or income, describing the way the rate moves from high to low, thus, the average tax rate crosses the marginal tax rate

2. Proportional tax: Tax rate is same for every individual irrespective of his/her income

Example: A country where tax rate is fixed at 10%. Everyone willl pay 10% of their income in taxes

"proportional" here means the distribution effect on expenditure or income, describing the way the rate remains constant, thus, the average tax rate remains same as the marginal tax rate

3. Progressive tax: Tax paid (as proportion of income) increases as income increases.

Example: A country with slabs of tax rates. As the income crosses a slab, tax rate increases

"Progressive" here means the distribution effect on expenditure or income, describing the way the rate moves from low to high, thus, the average tax rate remains less than the marginal tax rate


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