Tax Systems | Proportional, Progressive and Regressive Taxation | Economics

What Is the Difference between Proportional, Progressive and Regressive Taxation?

In economics, we differentiate between three main types of taxation, namely: proportional taxation, progressive taxation and regressive taxation.

Economics | Progressive vs. Proportional vs. Regressive Taxation

Proportional Taxation

Proportional taxation is observed when the taxation level is fixed, i.e. there is a fixed proportion of tax levied on all amounts of income, now matter how high the income is. A proportional tax is also called a flat tax. A sales tax can be cited as an example, for all consumers are required to pay the same fixed rate irrespective of their earnings. Generally speaking, proportional taxation is a fair system due to the fact that the proportional tax is equal across the income board. Moreover, its collection and administration is simple and easy to apply. In addition to this, proportional taxation motivates people to earn more and excel, for it does not charge people at a higher rate when they earn more.

Progressive Taxation

Progressive taxation is based on the assumption that the tax rate should increase as the taxable income increases. The main consideration is that a more affluent income group has to pay more taxes than the less affluent one. The most important example of progressive taxation is the income tax which presupposes that people who gain more have to contribute more to society based on their ability to pay. The latter reasoning is highly controversial and discriminatory as such a system tends to penalise the brightes and the most hard-working people who have to literally fund all sorts of modern 'welfare programs' which help those who do not want to work to parasitise on their efforts.

Regressive Taxation

The regressive taxation system is the opposite of progressive taxation. Regressive taxation is imposed in a way that the tax rate should decrease as the taxable income increases, Thus, there is an inverse relationship between the tax rate and the taxpayer's income. Proportional taxation can also be regarded as regressive. Although normally regressive taxation is uniform, such examples of regressive taxes as tobacco tax, tax on transportaion and some others are regressive by nature because the more the person earns the smaller proportion of the income he or she should pay in form of a tax.