Regressive taxation systems are more likely to be found in developing countries or emerging market economies than in the economies of developed countries. The predominance of regressive taxation in less-developed countries is mainly due to the fact that regressive tax systems are generally simpler tax systems. Countries with less-developed economies overall are also countries likely to have simpler, less-complex tax systems, if for no other reason than the fact less-developed governments have less ability to administer and collect more complex tax policies. Also, in less-developed economies, there is commonly less widespread disparity in income. That is to say, a much larger percentage of the population, as compared to that of developed countries, probably has roughly the same level of income. The net effect of such a situation is to make a regressive tax system less regressive since the vast majority of the population suffers essentially the same impact from the tax system. It can be argued that this common equality of tax burden renders a regressive taxation system more properly referred to as a proportionate tax system.
There are three main types of taxes or tax systems: regressive, proportionate or progressive. The differences between the three types of taxes are shown in the effect on the tax that results from changes in the base of the tax, such as income. For example, changes in income have little effect in terms of tax rates and amounts paid with a regressive income tax but have substantial effect where the income tax system, as in the United States, is highly progressive. Regressive taxes result in lower-income individuals or entities paying a higher percentage of their incomes in taxes than higher-income individuals or entities. Typical regressive taxes are the taxes known as "sin taxes," such as taxes on cigarettes and alcohol, since such taxes take a much higher percentage of income from low-income people than high-income people.
Proportional taxes, also referred to as flat taxes, are taxes that take the same proportion or percentage of income from everyone subject to the tax. A flat tax is one of the popular proposed alternatives to the current, very progressive U.S. income tax system. Some economists argue that proportionate taxes are the fairest tax system because the tax is applied, in percentage terms, equally across the board to everyone who is part of the system.
Progressive tax systems place a proportionately higher burden on upper-income individuals or entities as compared to lower-income individuals or entities. This is the tax system most commonly found in developed nations such as the U.S. or Canada. In a progressive tax system, the marginal tax rate, the tax rate resulting from increases in income, is higher than the average tax rate.