Cambridge International as and a level Economics Ebook

1 Proportional 
taxes
,
 
whereby as income rises, the 
proportion of income paid in tax remains the same; the tax 
rate is therefore constant.
2 Progressive 
taxes
are those that when income rises, 
the proportion of the total paid in taxes increases; the 
average rate of taxation will therefore be lower than the 
marginal rate.
3 Regressive 
taxes
are those that as income rises, the 
proportion of total income paid in tax falls. Hence, the 
average and the marginal rates of taxation are falling.
Proportional tax: 
one that takes the
 
same proportion or 
percentage from all who have to pay it.
Progressive tax: 
a tax that takes a higher percentage from 
those with higher incomes.
Regressive tax: 
a tax that takes a greater percentage from 
those on lower incomes.
KEY TERMS
Th
e signifi cance of this classifi cation is important from an 
equity standpoint. As incomes increase, people clearly pay 
more tax in absolute terms; what is more relevant is the 
percentage 
of income paid in tax.
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Cambridge International AS Level Economics

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Th
e best example of a progressive tax is income tax. 
Low-paid workers are usually given allowances that mean 
that they pay little or even no tax at all. Th
e tax rate may 
start at 10%, rising in stages to 50% or even 90% in some 
tax regimes. As the rate increases there is likely to be 
some disincentive to work on the part of high-earners. 
Th
ere may even be an exodus of such earners to low-tax 
countries if the rate is too punitive.
Typical regressive taxes are VAT and GST. Th
ese sales 
taxes are widely applied in virtually all types of economy. 
Both are fl at-rate sales taxes paid at standard rates of 10, 13, 
15 or 20%. Th
is means that the price of a Big Mac or a can of 
Coca-Cola is the same for someone on a low wage as it is for 
a multi-millionaire. As consumer spending does not increase 
at the same rate as an increase in income, these taxes are 
regressive. Th
ey hit the poor relatively more than the rich.
Governments have decisions to take about their tax 
regimes, the most important being achieving the right 
balance between direct and indirect taxes. A trend in 
many economies has been to collect increasing revenues 
from indirect taxes on expenditure since these can 
usually be collected quickly, are less liable to evasion and 
corruption and do not interfere with the work incentive 
problem. Th
ose economies that are compliant with this 
strategy are therefore supporting a regressive tax system, 
one that will not be well-liked by low- and middle-income 
earners. Th
is is particularly the case in developing and 
emerging economies, where it is rather easier to levy 
indirect rather than direct taxes as a means of establishing 
a secure tax regime.