Progressive tax imposes a higher percentage rate of taxation on those with higher incomes and lower rate of tax for lower income earners. It carries the principle of equality in distribution of income and also benefits in government revenue. Income tax is both progressive and proportional in nature.
Progressive taxes use a marginal tax rate that increases as the amount of taxable income increases. Therefore, the percentage of income paid in taxes increases as income goes up.
Regressive tax imposes a higher percentage rate of tax on lower incomes than on higher incomes. Sales tax, excise duties and property taxes are the examples of regressive tax. For example, if the sales tax is 17% on goods purchased by both higher salary earner and lower salary earner, the person with the lower income would pay a greater percentage of their total income in sales tax.
Proportional tax imposes the same percentage of taxation on everyone, regardless of income. Individuals will pay same rate of taxes regardless of income. If the percentage tax rate is constant, the average tax rate is constant, regardless of income. This means that if a person’s income goes up, the percentage of total income paid in taxes doesn’t change.
|Name of Individuals||Monthly Income||Income tax Paid||Sales tax paid on Petrol||Paid tax on grocery items||Tax paid on purchase of bike|
Explain what are Progressive, Regressive and Proportional Tax?
By analyzing from the above scenario
- Income tax paid by the three individuals is proportional taxes
|Individuals||Income||Income tax Paid||Percentage of tax paid / monthly income|
|Mr. A||50,000||10,000||10,000 / 50,000 x 100 = 20 %|
|Mr. B||100,000||20,000||20,000 / 100,000 x 100 = 20 %|
|Mr. C||150,000||30,000||30,000 / 150,000 x 100 = 20 %|
- Sales tax on petrol is regressive tax
|Individuals||Income||Tax Paid on Petrol||Percentage of tax paid / monthly income|
|Mr. A||50,000||3,000||3,000 / 50,000 x 100 = 6 %|
|Mr. B||100,000||3,500||4,000 / 100,000 x 100 = 4 %|
|Mr. C||150,000||4,000||4,500 / 150,000 x 100 = 3 %|
- Tax on grocery item is progressive tax
|Individuals||Income||Tax Paid on Grocery Items||Percentage of tax paid / monthly income|
|Mr. A||50,000||2,500||2,500 / 50,000 x 100 = 5 %|
|Mr. B||100,000||11,000||11,000 / 100,000 x 100 = 11 %|
|Mr. C||150,000||20,000||20,000 / 150,000 x 100 = 13.33 %|
- Tax paid on bike is regressive tax
|Individuals||Income||Tax Paid on bike purchase||Percentage of tax paid / monthly income|
|Mr. A||50,000||2,000||2,000 / 50,000 x 100 = 4 %|
|Mr. B||100,000||2,000||2,000 / 100,000 x 100 = 2 %|
|Mr. C||150,000||2,000||2,000 / 150,000 x 100 = 1.33 %|