Question

in three full paragraphs, write your understanding of progressive, regressive and proportional tax along with choosing one State, Federal or Local tax and explain why it fits into one of the categories and why?

Answer 1

In case of a progressive tax the marginal rate of taxation increases as income or wealth of individuals increases. Thus average rate of taxation increases. It is one of the best methods that reduces inequality. Lower income groups pay less and higher income groups more. Thus income gap is reduced. Under progressive tax system govt can raise sufficient revenue to help poor people. Further whenever income of household falls taxes on them decrease. Thus it provides safety. But people who merely break into new tax slab may be better without increase in income as they have to pay more after income increases. Further people may not reveal their true income and may keep savings in tax heavens . it may reduce willingness to work. Income tax in usa is example of progressive tax

In case of proportional tax rate of taxation does not change as income increases. Here income of individual does not effect tax rate. It is equal across all income groups so some people consider it fair tax system. It is easy to understand and implement. It can't be evaded according to its proponents . It doesn't decrease willingness to work. But it is regressive. It increases inequality.

In regressive tax system tax rate falls as income or wealth of individuals increases . it imposes grater burden on poor than rich as rich contribute less proportion of income than poor.. poor are hit badly. Taxes on cigarettes, sales taxes etc are regressive. There is freedom of choice as only those are taxed who consume s good. It can be used to reduce consumption of harmful goods like alcohol. However there is loss of tax revenue.