Progressive, Regressive and Proportional Taxes

There are three kinds of the taxes on the basis of their quantum / ratio of charging viz. regressive tax progressive tax and proportional or flat tax.

Regressive Tax

A regressive tax is the one in which tax rate decreases as the amount subject to taxation increases; and the tax rate progresses from high to low. The lowest amount is subject to higher taxation and this leads to individuals with low income bear the highest burden of regressive taxes. Such tax does not take into account the ability to pay.

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. Apart from indirect taxes, some other regressive tax examples are sin tax (tax on intoxicants such as tobacco and alcohol, which are more consumed by lower classes); toll tax (every passing vehicle of same type has to pay irrespective of income of the person travelling in that vehicle) etc.

Progressive Tax

In progressive taxation, the tax liability increases with individual or entity income. This is based on principle of “ability to pay”. Under this system, lowest income people are generally exempted while highest income people pay highest taxes. Income Tax is thus an example of progressive tax. Progressive taxation results in redistribution of income from rich to poor.

Proportional Tax

In this system, a flat tax is levied regardless of income of wealth. One example of corporation tax in India whereby  government charges a flat rate of 30% on the income earned by the companies in India.

Implications of  Progressive and Regressive Taxes

Progressive Tax follows the principle of ‘ability to pay’ because they are levied on the basis of individual’s income and wealth. Since, ability to pay can be measured, the direct taxes are imposed at progressive rate whereby richer persons pay higher taxes in comparison to the poor person. A regressive tax is generally a tax that is applied uniformly and is indirect in nature. This means that it hits lower-income individuals harder. The direct taxes are easy to collect in comparison to indirect taxes because a tax payer makes his own payments. It is generally paid as large amount and sometimes involves too much personal information. 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. Indirect taxes have wider coverage and broad base. 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. Indirect taxes inflate the price of the goods, they lead to inflation. 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.