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Categories of taxes

Taxes can also be classified on the basis of their nature. A tax system/structure may be

Progressive

A tax system where the tax liability increases with the increase in the income. The idea is to charge more tax from high income earners and low tax from low income earners. This tax system is based on the principle of equality.

Example

 Income tax slabs 2012-2013 for General tax payers

Income tax slab (in Rs.)

Tax

0 to 2,00,000

No tax

2,00,001 to 5,00,000

10%

5,00,001 to 10,00,000

20%

Above 10,00,000

30%

 

Regressive

This percentage of tax decreases as the income increases. In terms of individual income and wealth, a regressive tax imposes a greater burden on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer's ability to pay as measured by assets, consumption, or income.

Regressive taxes amount to a large share of government’s income. They are also used to discourage the use of demerit goods. However, indirect taxes promote income inequality.

Examples

Indirect taxes are regressive in nature. For example, if Jane has $10 and John has $5, a tax of $1 on a purchase would result in a different percentage of total income applied to taxation, 20% for John and 10% for Jane. Thus, a tax that is fixed to the value of the good/service would likely, in effect, result in a higher burden of taxation to people with less money.

Extra reading http://www.rediff.com/money/2005/mar/21vat2.htm

Proportional Tax

A proportional tax is one that imposes the same relative burden on all taxpayers—i.e., where tax liability and income grow in equal proportion. In simple terms, it imposes an equal burden (relative to resources) on the rich and poor. Proportional taxes maintain equal tax incidence regardless of the ability-to-pay and do not shift the incidence disproportionately to those with a higher or lower economic well-being.

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