Question

What is the difference between a progressive tax, a proportional tax, and a regressive tax?

Short answer

A progressive tax is a tax system where the percentage of tax levied increases as income levels rise, causing higher-income individuals to pay a larger share of their income in taxes. An example is the federal income tax in the United States. A proportional tax, or flat tax, is a tax system where the same percentage rate is applied to everyone, regardless of income level. An example is a sales tax. A regressive tax is a tax system where the percentage of tax levied decreases as income levels rise, causing lower-income individuals to pay a larger share of their income in taxes. An example is a consumption tax or value-added tax (VAT).

Step-by-step solution

Progressive Tax

A progressive tax is a tax system in which the percentage of tax levied on an individual's income increases as the income level rises. In this case, higher-income individuals pay a larger share of their income in taxes compared to lower-income individuals. This type of tax system is usually designed to redistribute wealth from those with higher incomes to those with lower incomes. An example of a progressive tax is the federal income tax in the United States, where there are different tax brackets, and higher-income individuals are taxed at higher rates.

Proportional Tax

A proportional tax, also known as a flat tax, is a tax system in which the same percentage rate of tax is applied to everyone, regardless of their income level. This means that both high-income and low-income individuals pay the same proportion of their income in taxes. A proportional tax system can be considered fair by some, as everyone is paying the same rate. However, critics argue that it disproportionately benefits high-income individuals who can better afford to pay the tax. An example of a proportional tax could be a sales tax, where everyone pays the same tax rate on goods and services they purchase.

Regressive Tax

A regressive tax is a tax system in which the percentage of tax levied on an individual's income decreases as the income level rises. In this case, lower-income individuals pay a larger share of their income in taxes compared to higher-income individuals. Regressive tax systems are often criticized for placing a greater financial burden on those with lower incomes. An example of a regressive tax is a consumption tax or a value-added tax (VAT), where the poor might end up spending a larger percentage of their income on goods and services compared to the rich.