Types of Taxation in Economy

Progressive taxation

Progressive taxation structure progressively increases the percentage of a citizen's income (or wealth) which is paid in tax as income (or wealth) increases. In progressive taxation the consequence should be that the more well off are taxed at a higher rate than are the less well off.

Progressive taxation takes into account the ability to pay. Progressive taxes reduces the tax incidence of people with a lower ability-to-pay, as they shift the incidence increasingly to those with a higher ability-to-pay. In progressive taxation people with more disposable income pay a higher percentage of their income in tax than do those with less income.

Regressive tax is the opposite of a progressive tax. In regressive tax the tax rate decreases as the amount subject to taxation increases.

High levels progressive taxes could encourage emigration since taxes are not internationally harmonized. High earners relocate in order to pay less tax, or find tax havens for their income.

Regressive Taxation

Regressive Taxation structure requires the more well-off to pay a lower percentage of their income (or wealth) in tax than a less well-off citizen. Sales tax and the federal goods and services tax (GST) are of this type as these taxes remain constant regardless of one's income.

The opposite of regressive taxation is progressive taxation, where taxation structure progressively increases the percentage of a citizen's income (or wealth) which is paid in tax as income (or wealth) increases.

The consequence is that the more well-off citizen pays a smaller percentage of their income to cover the tax on a new refrigerator than does a less well-off person.

There is a widespread view that strong reliance on "regressive taxes" was conducive to building and maintaining large tax/welfare states? The argument is that of the alleged superiority of "regressive taxes" with respect to states' revenue-raising capacity.

An example of a regressive tax is sales tax while an example of a progressive tax is income tax.

Regressive taxation does raise political issues but is rooted in mathematics rather than political platforms. The basic difference between the two lies in the way in which the two types of taxation affect individuals in different income levels. The regressive tax places a heavier tax burden on the poor while the progressive tax places higher taxes on the rich. With progressive taxation, the more money an individual makes, the more taxes that individual incurs. With regressive taxation, the less money an individual makes the more taxes they incur.

Proportional Taxation

In between regressive taxation and progressive taxation is proportional taxation, where the tax rate is fixed as the amount subject to taxation increases. The opposite of proportional tax is fixed tax. Proportional taxation applies equally to the poor and to the wealthy.

An example of proportional taxation is ad valorem taxation on houses. Though, because the poor spend a disproportionately higher amount on housing, the ad valorem tax may seem regressive, placing a relatively heavier burden on the poor.

Flat Taxation

Flat tax or flat rate tax is a constant rate tax system. Flat tax refers to income being taxed at one marginal rate, in contrast with progressive taxes.

Flat tax structure has gained significant public support in North America. Flat tax structure in which all citizens would pay the same flat percentage of taxation on their income.

Flat tax would simplify tax law and the completion of a tax return but would make income tax regressive.