Note on Concept of Progressive, Proportional, Regressive and Digressive Tax

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  • Things to remember

CLASSIFICATION OF TAX

Tax has been classified into the following four parts based tax payer's income and tax rate:

  1. Progressive Tax
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If the tax rate increases along with the increment in the income, then this tax system is called progressive tax system. In simple words, the tax rate is higher on to rich and lower on poor people. This type of tax in uncommon in advanced economies. This helps to reduce unequal distribution of income and wealth in the society. The progressive tax system can be explained with the help of the following example:

Income (Rs)

Tax Rate (%)

Tax Amount (Rs)

10000

5

50

50000

10

5000

100000

15

15000

The above table shows that the rate of tax and income level. Here, when the income is Rs.10000 then the tax rate is 5% and when the income is increased to Rs.50000 then the tax rate is also increased to 10%. Similarly, with the increase in the income, the tax rate also goes on increasing. Hence, a number of tax increases from Rs.500 to Rs.15000.


It can be shown from the following figure:

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In the above figure, OP line shows the progressive rate of taxation. Here, when the income OY1, the tax rate is OR1. Similarly, when the income is increased from OY1 to OY2 and OY3 the tax rate also increases from OR1 to OR2 and OR3.

Merits of Progressive Tax

  • As rich people pay more than the poor so the progressive taxes are equitable.
  • It helps to reduce unequal distribution of income and wealth.
  • It yields more revenue so it is productive.
  • It is economical because the cost of the collection tends to be lower.
  • It is elastic in nature.

Demerits of Progressive Tax

  • There is the chance of tax evasion.
  • It discourages the saving and investment.
  • The rate of tax may be changed every year according to the news of the government so it is unstable.

2. Proportional Tax

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According to the proportional tax system, all the tax payers should pay tax at a similar rate that means the similar rate of tax is imposed on rich and poor people by the government. In other words, even when the level of income and wealth has increased, the rate of tax remains same. The proportional tax can be explained with the following table:

Tax income (Rs.)

Tax rate (%)

Tax amount (Rs.)

10000

10

1000

50000

10

5000

100000

10

10000

The above table shows that when the income is Rs.10000 then the tax rate is 10% and when the income is increased from Rs.10000 to Rs.50000 then the tax rate remains same. Similarly, as income increases from Rs.50000 to Rs.100000 then the tax rate still remains same. Hence, the tax rate remains at 10% on every level of income.
It can be shown in the following figure:


s

In the above figure, the rate of tax is fixed at OR at the different level of income OY1, OY2 and OY3. Here, OP line shows the proportional tax.

Merits of Proportional Tax

  • It is simple and easy to understand as the rate of the tax is same.
  • It encourages the saving and investment due to uniform rate.
  • It is simple to calculate as the rate is same for ever level of income.

Demerits of Proportional Tax

  • It doesn’t follow the principle of equitability as the rate of tax is same for both poor and rich people.
  • It is inelastic nature.
  • As the burden of a tax is more in poor than rich so it brings social justice.

3. Regressive Tax

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According to the regressive tax, the rate of tax decreases with the increase in the level of income. In other words, the rate of tax is charged lower on the higher level of income and the rate of tax is charged higher on the lower level of income. This type of tax is found rarely in the world because it increases income inequality and social injustice.


The regressive tax can be explained with the following table:

Tax income (Rs)

Tax rate (%)

Tax amount (Rs)

1000

10

100

2000

7

140

3000

5

150

The above table shows that when the income is Rs.1000 then the rate of tax is 10% and when the income is increased to Rs.2000 the tax rate is decreased to 7%. Similarly, when the income is Rs.3000 the tax rate is a decrease from 7% to 5%. So, when the income level is increased the tax rate is decreased.
It can be shown in the following figure:

s

The above figure shows that the income is increased from OY1 to OY2 to OY3, the tax rate decreases from OR3 to OR2 to OR1 respectively. Here, the line OP moves downward with every increase in income and vice-versa.

4. Digressive Tax

It is a mixture of progressive tax and proportional tax. According to the digressive tax, the tax rate in increased up to a certain level of income and after that, the tax rate is uninformed. It gives more burden to poor than rich. The digressive tax can be explained with the following figure:

Tax income (Rs)

Tax rate (%)

Tax rate (Rs)

1000

2

20

2000

4

80

3000

6

180

4000

8

320

5000

8

400

The above table shows that when the income is Rs.1000 the tax rate is 2%. And when the income increases to Rs.5000 then the tax rate is 4%. When the income level increases from Rs.10000 to Rs.50000 the tax rate becomes uniform that is 8%.

It can be shown in the following figure:

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CHARACTERISTICSOF GOOD TAX SYSTEM

Usually, nobody wants to pay a tax to the government but the government has imposed a tax on the citizens as their compulsory duty. Therefore , the government has to adopt such tax system that is socially fair and beneficial. Hence, there are some the characteristics of good tax system given below:

  • Canon of equity:

The tax burden must be equally distributed among the taxpayers. The canon of equity states that the taxes are to be imposed in accordance with the principle of ability to pay. Thus, the higher the income, higher the tax and lower the income, lower the tax.

  • Canon of certainty:

The tax which an individual has to pay should be certain. The time of payment, amount to paid, method of payment, place of payment and the authority to which the tax is to be paid must be determined properly. Similarly, there must be certainty of revenue that government intends to collect.

  • Canon of elasticity:

The government has to implement such types of the tax system in which it can raise the revenue easily by making a small change in tax basis or tax rate. Thus, canon of elasticity implies that a tax should be elastic in yield.

  • Canon of flexibility:

While elasticity is needed for raising the amount of revenue, flexibility refers to the possibility of changing entire tax system at the time of need. For e.g.: the government may switch to progressive tax system from proportional if it finds it necessary. Flexibility also influences the elasticity.

  • Canon of simplicity:

The objective of tax should be transparent to the taxpayers. Similarly, the paying method and time should be made simple and for the people to understand easily.

  • Canon of uniformity:

As far as possible, a tax should be imposed in all the areas evenly, so that the taxpayers will not feel discriminated and are encourage to pay the tax. So, every tax must be simple and intelligible to the people.

  • Canon of economy:

The cost of collecting a tax should be as minimum as possible because of the cost is higher than it would be meaningless to collect the tax. Thus, the maximum part of the collected amount should be deposited in the government treasury.

  • Canon of diversity:

There should be diversity in the tax system. The burden of the taxation must be spread among different kinds of people. Thus, the good tax system must be dynamic.

(Jha, Bhusal and Bista)(Karna, Khanal and Chaulagain)(Khanal, Khatiwada and Thapa)

Bibliography

Jha, P.K., et al. Economics II. Kalimati, Kathmandu: Dreamland Publication, 2011.

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.

Khanal, Dr. Rajesh Keshar, et al. Economics II. Kathmandu: Januka Publication Pvt. Ltd., 2013.

  1. In progressive tax,  tax rate increases along with the increment in the income. 
  2. In proportional tax system, all the tax payers should pay tax at a similar rate.
  3. In regressive tax, the rate of tax decreases with the increase in the level of income.
  4. In digressive tax, the tax rate in increased up to a certain level of income and after that the tax rate is uninformed.

Characteristics of Good Tax System

  1. Canon of equity
  2. Canon of certainty
  3. Canon of elasticity
  4. Canon of flexibility
  5. Canon of simplicity
  6. Canon of uniformity
  7. Canon of economy
  8. Canon of diversity
.

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