Question

Taxes play a large role in fiscal policy. How do economists differentiate/analyze the different types of taxes(proportional, regressive, and progressive taxes)?

Answer 1

The government has use tow tools to manage the economy. They are, expansionary and contractionary. Expansionary means that to increase economic activity. Contractionary means that decrease economic activity. The government use two fiscal policy, they are

1. Government spending :To increase or decrease economic activity
2. Taxing : To decrease or increase economic activity

Taxes play a large role in fiscal policy. The tax is the imposition of financial charges upon a company or an individual by the government or similar other functional equivalents in a state

Different types of taxes

1. Proportional tax

• Proportional tax implies that the rate of tax does not change with the change in icome, that means the tax remains constant as a proportion of income as incomes increase
• The marginal rate of tax is constant
• A direct tax on income may be a flat rate, the households pay 15% of their income in tax
• It promote income equality

2. Regressive tax

• It implies that the rate of tax decrease with increase in income
• The rate of tax falls as income rise
• That consisit of a large percentage of poor households income than a rich households income
• The sales tax is an example of regressive tax, it is an indirect tax.
• It promote income inequality

3. Progressive tax

• It implies that the rate of tax increase with increase in income
• The marginal rate of tax rises an income rises
• It promote greater income equality
• People earn more income, the rate of tax on each etra rate goes up
• The result is to rise in the average rate of tax