Progressive, Proportional and Regressive tax, Definition and Examples

 

Progressive, Proportional and Regressive tax, Definition and Examples

Progressive, Proportional and Regressive tax, Definition and Examples

Progressive, proportional and regressive tax systems are the three types of way how the government imposed the taxes and how it affected the tax payer. In this article we are discussing the three types of tax system with suitable examples and clarify the ideas.

Definition of progressive tax

Progressive tax is a tax system where tax payer pay higher tax rate as his /her taxable income goes up. 

It is called progressive because it imposed lower tax burden on low income group and higher tax rate to the higher income group, to bring the equality in the society. In progressive tax system different tax rates are prescribed for different levels of incomes slabs. Progressive tax system tries to dissolve the inequality from the society.

Example of progressive tax

In progressive tax system government imposed different tax rate as the slab of the income changes. The percentage of tax rate is lower for lower income group whereas tax rate is higher for higher income group. Suppose the income level of a group of people is Rs 2 lakes per year, then the tax rate imposed on them will be zero. Here government realizes that the tax payer will not be able to pay tax within these income levels, so these levels of income groups are exempt from the income tax. On the other hand a another group of people whose yearly income is Rs 5 lakhs-7.5 lakes government has imposed  the tax rate is 10%.i.e, the tax payer have to pay 10% of his /her taxable income to the government as a tax. If the level of income is 12.5 lakhs-15 lakes then the tax rate will be 25% of his/her taxable income. Every year when the government has announced the financial budget, declare the tax slab and the tax rate of the particular slabs.

As we all know that the marginal utility of any commodity is diminishing as the consumer consuming more amount of that commodity. So the marginal utility of money is also diminishing as the person earned higher level of income. Suppose government announce 10% tax rate for all the income group, then the person whose taxable income is Rs 2 lakes per year have to pay Rs20000 as a tax on the other hand a person whose taxable income is Rs 10 lakes have to pay Rs 100000 as a tax, but as the marginal utility diminishing the person whose income is Rs 2 lakes bear more burden of tax than the person who earned Rs 10 lakes. So as per progressive and fair judgment of tax rate progressive tax is good for the country. Many developed and developing countries like, Germany, India, Denmark, Belgium imposed progressive tax system.

Definition of Proportional tax system

Proportional tax system means when government fixed the percentage of tax rate for all level of income groups is known as proportional tax system. In proportional tax system government does not divided taxable income slabs only fixed the percentage of income as a tax that the tax payer pay the government. Proportional tax system is also known as flat tax.

Example of Proportional tax

In proportional tax system, suppose a group of people taxable income is Rs2.5 lakes and government fixed tax rate is 15%, then this group of people have to pay 15% of his taxable income. On the other hand another group of people taxable income is Rs12 lakes,then they have to pay 15% are of his/her taxable income .Countries like Bulgaria; East Timor, Estonia, Georgia imposed proportional tax rates.

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                       Invisible hand in economics 

Definition of Regressive tax

Regressive tax system means, regardless of any type of tax slabs when government imposed same amount of tax for all. In regressive tax system low income group bear the larger amount of tax burden compare to high income group. Indirect tax is considered as a regressive tax.

Example of Regressive tax

Suppose, government imposed 7 % of GST on a pair of shoes whose value is Rs 2000. So the value of the shoe with tax is now Rs2140. A low income group person whose monthly income is Rs 20000 bear the higher tax burden than the higher income group whose monthly income is Rs80000. Any type of indirect tax like service tax, sales tax, Good and service tax (GST) consider as a regressive tax.

 

Tax slabs (P.A)	Progressive tax			Proportional tax	Regressive tax
0 ----Rs250000	Nil			15%	Rs140
Rs 250001-500000	5%			15%	Rs140
Rs500001-7,50000	10%			15%	Rs140
Rs 7,50000-10,00000		15%	15%		Rs140

 

Conclusions

In these three types of tax system progressive tax is considered most relevant and aggressive in social point of view, so it is often known as fair tax rates.