Progressive taxation and regressive taxation are the two types of taxation applied by the governments in order to reduce the economical inequality in the society.
The concepts of progressive taxation and regressive taxation are mainly implemented with the income tax. An income tax is the tax that is imposed on the income earned by an individual or a business. Depending on the tax incidence, the income tax can be divided mainly in three parts – progressive tax, proportional tax and regressive tax.
Under progressive taxation the tax rate increases proportionally with the increase of a person’s income. It can also be said that progressive taxation charges more tax from the higher income group people and charges lesser tax from the lower income group people. We can also say that in the progressive taxation system; the wealthy people pay more tax than the poor people. The word ‘progressive’ in the progressive taxation refers to the process that the rate of interest progresses from lower to higher income group.
The purpose of progressive taxation is to maintain the economic balance between the higher and lower income groups of the society. For example, the tax exemptions made on the basic necessities and imposition of high tax on the luxury goods so as to leave progressive effects on the society. This is because, such taxation decreases the tax burden from the low end purchases and increases tax burden on the high end purchases.
Regressive taxation is a type of taxation where amount of tax for an individual decreases as in proportion with increase of income of that person. It can also be said that sales tax is the example of regressive tax as it is imposed to each purchaser equally and hence the lower income group has to pay the larger percentage of their income. The concept of regressive tax is just opposite to that of the progressive tax.
Last Updated on : 1st July 2013