A Look at Progressive & Regressive Taxation

A progressive tax system imposes a higher percentage rate of taxation on higher income earners, which means that as a person’s income grows, so does the rate at which it is taxed. This model aims to reduce income inequality by ensuring that those with greater financial resources contribute more to the society they benefit from. On the other hand, a proportional tax, often referred to as a flat Regressive Vs Proportional Vs Progressive Taxes tax, taxes everyone at the same rate, regardless of income level.

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As a result of simplifying the information about the policy into a single number, such an approach must necessarily lose some information about the policy impact. However, the approach can be useful if it is important to express the results as a single number, such as if you wanted to compare the progressivity of tax systems in different countries. A regressive tax is a type of tax that decreases based on someone’s income.

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Also, since the indirect prices are paid concealed in the price, they don’t bring on civic awareness among the taxpayers in contrast to the direct taxes. While the proportional tax system offers simplicity and potential economic benefits, it also raises concerns about fairness and income inequality. The debate between proportional and progressive tax structures is ongoing, with each model reflecting different priorities and philosophies regarding taxation and social welfare. It’s a complex balance between economic efficiency and social equity, and the ideal tax system may lie somewhere in between, incorporating elements of both to achieve a fair and productive society. In practice, most successful tax systems combine elements of all three approaches. States mix income taxes, sales taxes, and property taxes in different combinations.

Higher Burden on Low-Income Earners

• The core principle behind this system is that those who have a higher ability to pay, typically measured by their income or wealth, should contribute a larger share of taxes.
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• One solution to this problem is to simply graph the results and allow readers to interpret them as they wish.
• These taxes are used to discourage consumption but can have a regressive effect.
• Economists generally prefer tax systems that minimize distortions to economic decisions.

The first decision is to determine the economic incidence (as opposed to the legal incidence) of the tax. In general, it is difficult to determine exactly who bears the burden of a tax, as taxes placed on producers may be passed on to consumers, either in part or in full. In practice, simplifying rules of thumb are often used, such as assuming that all GST is borne by the final consumer, and all income and payroll tax is borne by the employee. Understanding these systems empowers you to make informed decisions about tax policy proposals and their likely effects on your finances and community.

The Case Against Progressive Taxes

Ultimately, the design and implementation of tax systems require careful consideration of the potential consequences for all segments of society. Understanding the regressive nature of certain taxes is crucial for policymakers seeking to create a more equitable and sustainable economic environment. Taxation models are fundamental frameworks that governments use to collect revenue from individuals and businesses. These models are designed not only to fund public services and infrastructure but also to achieve economic and social objectives.

Critics argued that this is a lose-lose situation because higher taxes are not charged by either high- or low-income taxpayers, which consume more public services. Everyone pays the same percentage at checkout, but low-income households, which spend a larger share of their earnings on essentials, end up dedicating more of their total income to this tax. For example, a 7% tax on groceries impacts a person earning $1,000 a month much more than someone earning $10,000, even though the dollar amount paid is the same.

• At first glance, a regressive tax is an average tax deduction that is uniformly applied to all tax-paying citizens.
• The rates didn’t change from 2023 to 2024 but the ranges of income covered by the brackets increased to reflect inflation.
• This means that lower-income earners pay a higher proportion of their income in taxes compared to those with higher incomes.
• Progressive taxes help finance policies and public services that reduce inequalities, empower women, and promote social and economic justice.

Excise taxes are specific charges on particular goods such as gasoline, alcohol, tobacco, and sugary drinks. These taxes are typically built into the price of the product, making them less visible but no less burdensome. Since many of these items are commonly consumed across all income groups, lower-income individuals end up paying a higher share of their income to cover these taxes—especially on essentials like fuel. Regressive taxes are imposed at a consistent rate or amount for all taxpayers. Whether someone earns minimum wage or has a six-figure salary, they are taxed the same on specific items or services. This includes things like sales tax on consumer goods or flat toll charges.

Indirect Taxes Are Unavoidable

Since the tax amount is fixed, it constitutes a larger percentage of income for people who earn less. For example, a $50 tax might be negligible for someone earning $5,000 a month, but significant for someone earning $500. Another issue is that it is important to look at the progressivity of the tax system as a whole, and as a result it is dangerous to look at a single tax in isolation. For instance, it is often claimed that increasing the GST would make the tax system more regressive. This would be true if the GST was raised and the revenue used to fund a reduction in the income tax.

The second decision is to determine the appropriate unit base for comparison. We also call for the repeal of regressive tax policies that negatively impact women and marginalised communities. Beyond generating revenue, these progressive taxes could help shift power dynamics, empowering women and fostering a more equitable societal infrastructure for all. Indirect taxes, such as sales / service tax, are an example of regressive tax as the poor and rich pay the same tax in purchasing everyday products and services. There are three kinds of the taxes on the basis of their quantum / ratio of charging viz. A flat 7% sales tax applies equally to everyone, but it hits low-income families harder because they spend a larger portion of their income on taxable goods.

Further, since there is no scientific principle of defining the degree of progression, the direct taxes are fixed arbitrarily. Direct taxes are easy to manipulate and collect in comparison to indirect taxes. So, the governments end up collecting more revenues as the taxes cover almost every goods. Since the indirect taxes are a part of the price of commodities; these taxes are generally not evadable.