Question

In: Economics

Discuss the three different types of taxations: a Regressive Tax; a Proportional Tax and a Progressive...

Discuss the three different types of taxations: a Regressive Tax; a Proportional Tax and a Progressive Tax discussion the burden of each tax on the taxpayer.

Solutions

Expert Solution

Progressive Tax: It implies that the rate of tax increases with an increase in income. Suppose, a man has an income of $ 5000 per year, and he has to pay 10% tax. If his income increases to $ 10,000, the rate of tax may be 15%. Similarly, the rate of income tax may be 20% if the income rises upto $ 20,000. Progressive tax are equitable. Their real burden is more on the rich and less on the poor.

Regressive tax: It implies that the rate of tax decreases with increase in income. If a person with $ 100,000 as his monthly income pays 10% income tax he still has a balance of $ 90,000 per month. But if a person with $ 500 as his monthly income has to pay 10% i.e. $ 50 then it might mean a cut in his essential consumption. It imply that a poor diet and therefore poor health. Such a taxation is certainly regressive in nature.

Proportional Tax: It is a form of tax in which the tax rate is fixed and there will be no change in tax rates whether person earn high or low income. Example: Sales tax is levied equally among all people.


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