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Tax systems fall into three main categories within the tax code: regressive, proportional and progressive taxes. Regressive taxes are those that have a greater impact on low-income individuals than high-income earners. A proportional tax, also referred to as a flat tax, impacts low-, middle- and high-income earners relatively equally. A progressive tax has more of an impact on higher-income individuals and businesses, and less of a financial impact on low-income earners.

Regressive Taxes

Under a regressive tax system, individuals and entities with low incomes pay a higher amount of that income in taxes compared to high-income earners. Rather than implementing a tax liability based on the individual or entity's ability to pay, the government assesses tax as a percentage of the asset that the taxpayer purchases or owns.

For example, a sales tax on the purchase of everyday products or services is assessed as a percentage of the item bought and is the same for every individual or entity. However, a sales tax of 7% has a greater burden on lower-income earners than it does on the wealthy because the ability to pay is not taken into consideration. Regressive taxes include real estate property taxes, state and local sales taxes as well as excise taxes on consumables such as cigarettes, gasoline, airfare, or alcohol.

Interested in what countries the regressive tax system is implemented in? Read In what types of economies are regressive tax systems common?

Proportional Taxes

A proportional tax system, also referred to as a flat tax system, assesses the same tax rate to taxpayers regardless of income or wealth. It is meant to create equality between marginal tax rate and average tax rate paid. Under a proportional tax system, individual taxpayers pay a set percentage of their income regardless of total income earned.

For example, an income tax of 10% that does not increase or decrease as income rises or falls results in a proportional tax. In this example, an individual who earns $20,000 annually pays $2,000 under a proportional tax system, while someone who earns $200,000 each year pays $20,000 in taxes. Some specific examples of proportional taxes include per capita taxes, gross receipts taxes, and occupational taxes.

What do you think? Should the US switch to a flat tax?

Progressive Taxes

The current federal income tax in the US is a progressive tax system, in that the proportion of tax liability rises as an individual or entity's income increases. Tax burdens are meant to be more of an imposition to wealthy, high-income earners than they are to low- or middle-class individuals.

Under a progressive tax system, taxes assessed on income and business profits are based on a progressive or increasing tax rate schedule. Marginal tax rates under a progressive tax system are often higher than the average tax rates that are paid. Estate taxes are another example of progressive taxes, as a greater burden is placed on wealthy individuals.

There is some debate about whether progressive taxes are a fair tax policy. Read on here - What are the pros and cons of a progressive tax policy and who benefits the most from it? and Are progressive taxes fairer than flat taxes?

  1. What is the difference between a regressive tax versus a progressive tax?

    Determine how progressive and regressive taxes impact your personal finances, and learn more about how you pay both types ... Read Answer >>
  2. What is the difference between a regressive tax and proportional tax?

    Learn about the differences between regressive, progressive and proportional taxes and how they each affect everyday finances ... Read Answer >>
  3. What's the difference between regressive and progressive taxes?

    Learn what a regressive tax is in comparison to a progressive tax, and understand the specific types of taxes that are considered ... Read Answer >>
  4. In what types of economies are regressive taxes common?

    Understand the three main taxation systems, regressive, proportionate and progressive, and learn where regressive tax systems ... Read Answer >>
  5. Who first came up with the idea of a progressive tax?

    Learn how the progressive income tax system developed in the United States and became the federal government's primary revenue ... Read Answer >>
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  1. Progressive Tax

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  2. Proportional Tax

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  4. Taxes

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  5. Direct Tax

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  6. Income Tax

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