Explain each of the following types of taxes:
(a) Proportional tax;
(b) progressive tax;
(c) regressive tax.
Explanation
(a)Proportional tax: The rate of tax is the same , irrespective of the level of income. If a tax leads to both the rich and the poor paying the same proportion or percentage of their incomes as tax, then the tax is called proportional tax.
(b) Progressive tax: This is a form of tax in which tax rate increases as income increases. It takes a larger percentage of income from people with larger incomes. A progressive tax reduces inequality of income distribution. A good example is the PAYE.
(c) Regressive tax: The higher the income, the lower is the rate of tax. It is a tax system where tax rate decreases as income increase. In this type of taxation, a poor person pays a higher proportion of his income, e.g, poll tax.