Question

Distinguish between a progressive tax system and a regressive tax system. Consider two categories of people—the rich and the poor. Who—the rich or the poor—pay more tax under a progressive tax system? Who pay more tax under a regressive tax system? Who pay a higher percentage of their taxable income under a progressive tax system? And who pay a higher percentage of their taxable income under a regressive tax system?

Answer 1

In a regressive tax system the government assess the tax as a percentage based on the value of assets that a taxpayers purchases or owns. Independent of how much an individual is earning, or level of his income under the regressive tax system he will be taxed based on his assets holdings and consumer durables. Whereas in progressive tax system the government assess the tax as a percentage of individual's level of income, it is progressive in nature that is someone earning more income will pay a higher amount of tax, as that individual will fall into a higher tax bracket.

Under progressive tax system the rich will pay more taxes as the name suggests the tax rate for higher income group is higher while for low or poor class the tax rate is at bare minimum. In US we have progressive tax system in which people earning more falls into higher tax brackets.

Under regressive tax system, as discussed above the burden of Taxation falls on poor more than rich because a poor is someone who is earning less than rich and taxing his assets is like taxing him his past income. And since he has low income his only support is the assets that he owns, while someone who is earning more can support his livelihood by his income. And regressive tax has no correlation with individual's income so all are taxes equally. The value of assets for individual with low income(poor) is higher than for someone who is earning more(rich).

And since we have already discussed that under progressive tax the tax is imposed on Individual's taxable income, so people with higher incomes are taxes higher. In other words poor people with low taxable income fall into lower tax bracket as opposed to rich people who falls into higher tax brackets. And as a results under progressive tax system rich pays higher percentage of their taxable income.

As discussed previously under regressive tax system there is no correlation between tax rate and individual's income. It is the tax on the amount of assets purchased or owned by an individual, a poor person will consume more while rich person saves more. So under regressive tax system the poor is going to pay higher percentage of his taxable income.