Progressive, Proportional & Regressive Taxes
- Tax systems can be classified as progressive, proportional or regressive
- Most countries have a mix of progressive (direct taxation) & regressive (indirect taxation) taxes in place
- Progressive tax system: as income rises, a larger percentage of income is paid in tax (e.g. UK Income Tax; UK Corporation Tax). This system is built around the idea of marginal tax rates
UK Progressive Tax Rates - June 2022
Tax Band Taxable Income Tax Rate Personal Allowance
Up to £12,500
0%
Basic Rate
£12,501 to £50,000
20%
Higher Rate
£50,001 to £150,000
40%
Additional Rate
Over £150,000
45%
Using this system, a salary of £60,000 would attract a tax bill of £11,499.80, calculated as follows:
First £12,500 - no tax
Next £37, 499 at 20% = £7499.80
Final £10,001 at 40% = £4,000 - Regressive tax system: as income rises, a smaller percentage of income is paid in tax (e.g. excise duties on alcohol & petrol in the UK; VAT; Air passenger duty). Regressive taxes can have a big impact on low-income households. In 2020 they represented 30% of income for the poorest 20% of households - but only 10% of income for the top 20% of households
- Proportional tax system: the percentage of income paid in tax is constant, no matter what the level of income e.g 10% tax is paid irrespective of whether income is £10,000 or £100,000. Bolivia uses this system & the tax rate is 13%