Classification of taxes
Progressive taxes
A progressive tax is a tax imposed so that the tax rate increases as the amount subject to taxation increases. In simple terms, it imposes a greater burden (relative to resources) on the rich than on the poor. It can be applied to individual taxes or to a tax system as a whole. Progressive taxes attempt to reduce the tax incidence of people with a lower ability-to-pay, as they shift the incidence disproportionately to those with a higher ability-to-pay. The result is people with more disposable income pay a higher percentage of that income in tax than do those with less income.
Example of Progressive tax in New Zealand | |
Income (New Zealand Dollar) | Tax rate (%) |
Up to 38,000 | 19.5 |
38001-60,000 | 33 |
Above 60,001 | 49 |
Example of Progressive tax in Australia | |
Income (Australian Dollar) | Tax rate (%) |
Up to 6000 | 0 |
6001-25000 | 15 |
25001-75000 | 30 |
75001-150000 | 40 |
Above 150000 | 45 |
Regressive Tax
The opposite of a progressive tax is a regressive tax, where the tax rate decreases as the amount subject to taxation increases. It imposes a greater burden (relative to resources) on the poor than on the rich. Regressive taxes attempt to reduce the tax incidence of people with higher ability-to-pay, as they shift the incidence disproportionately to those with lower ability-to-pay.
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.
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.
