The first type of tax is progressive taxes. A progressive tax is one where, as your income rises, you pay more tax in proportion to your income. Whereas a regressive tax is one where as your income rises, the amount paid in proportion to income falls. 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.
Taxation using progressive taxes is used with direct taxes, for example, income tax. Therefore we know that as income rises, a progressive tax takes a larger proportion of income. Though this might lead to a disincentive to work amongst the people, it is ultimately fairer to low income workers as it would lead to lower standards of living be it otherwise. 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.
