• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Distinguish between a progressive and regressive tax

Extracts from this document...

Introduction

Distinguish between a progressive tax system and a regressive tax system Governments use policies of taxation and government spending in a variety of ways. One of these factors is used to affect distribution of income in an economy. The government tries to correct inequality to a certain extent, so that the spread of income and living standards amongst its citizens will be more equal and fair. There are two main types of taxes in a country. ...read more.

Middle

Therefore the first difference between progressive and regressive tax systems is that in progressive taxes, average tax rises as income rises, whereas in the latter, average tax falls as income rises. The two methods of taxation have vastly different effects on different classes of society. Richer citizens will be more affected by progressive taxes, as those who earn a larger salary will have a bigger proportion taxed. Whereas, poorer citizens will be more affected by regressive taxes, as they will have a bigger proportion of their smaller salary taxed. ...read more.

Conclusion

Progressive taxes also encourage redistribution of income. Regressive taxes are indirect taxes, for example, Goods and Services Tax (GST). Regressive taxes take a larger proportion of income as incomes fall as it is taxed in the purchasing of goods. For example, if two customers spend $10 in a shop, but one's income is $100 and the other's is $10000, the regressive tax would have taken 10% of the first consumer's income but only 0.01% of the latter's income. Therefore, regressive taxes, though they have their benefits in possibly reducing the consumption of demerit goods, they may actually lead to a widening gap in income inequality, and do not encourage redistribution of income. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. What is the impact of the Notional Interest Tax Deduction system on investments in ...

    Since these two macroeconomic objectives are considered to be of extreme importance for every country in modern society, this tax system was first created and drafted between January 2004 to 2005 and was applied as from the 2006 tax year.2 Recently the Notional Interest Tax Deduction System has been in the press on various occasions.

  2. Asking to be Taxed and Regulated

    In the diagram we can see that firms such as Cinergy will not consider social costs and will overproduce. Cinergy produces too much compared to the socially optimal level. In the diagram we can see that on units q0q1 the social marginal cost is greater than the social marginal benefit, therefore there is allocative inefficiency (market failure).

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work