Progressive Tax - A tax that takes a larger percentage from the income of high-income earners than it does from low-income individuals.
The affect that it has on different income levels is that taxpayers are broken down into categories based on taxable income - the more one earns, the more taxes they will have to pay once they cross the benchmark cut-off points between the different tax bracket levels.
Example -
The United States income tax is considered progressive: in 2010, individuals who earned up to $8,375 fell into the 10% tax bracket, while individuals earning $373,650 or more fell into the 35% tax bracket.
Proportional Tax - A tax system that requires the same percentage of income from all taxpayers, regardless of their earnings.
The affect that is has with different income levels, since the wealthy save a much greater share of their income than the poor and middle class do. Most other fixed rate taxes; such as excise taxes, suffer from this same unintended consequence.
Example -
all taxpayers may be required to pay 10% of income in taxes. A sales tax can be considered a type of proportional tax since all consumers, regardless of earnings, are required to pay the same fixed rate.
Regressive Tax - tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is generally a tax that is applied uniformly, which means that it hits lower-income individuals harder.
The affect that it has on income levels, is people like sales tax, in order to make them compare poorly with income tax in terms of their "fairness". The rationale is that individuals or families at the low end of the income spectrum spend a higher proportion of their income than those at the high end. Combined with the fact that sales tax is tied to consumption rather than income, this leads some to the conclusion that low-income individuals and families pay a greater proportion of their incomes in sales taxes, therefore sales tax is regressive.
Example -
if a person has $10 of income and must pay $1 of tax on a package of cigarettes, this represents 10% of the person's income. However, if the person has $20 of income, this $1 tax only represents 5% of that person's income.
The affect that it has on different income levels is that taxpayers are broken down into categories based on taxable income - the more one earns, the more taxes they will have to pay once they cross the benchmark cut-off points between the different tax bracket levels.
Example -
The United States income tax is considered progressive: in 2010, individuals who earned up to $8,375 fell into the 10% tax bracket, while individuals earning $373,650 or more fell into the 35% tax bracket.
Proportional Tax - A tax system that requires the same percentage of income from all taxpayers, regardless of their earnings.
The affect that is has with different income levels, since the wealthy save a much greater share of their income than the poor and middle class do. Most other fixed rate taxes; such as excise taxes, suffer from this same unintended consequence.
Example -
all taxpayers may be required to pay 10% of income in taxes. A sales tax can be considered a type of proportional tax since all consumers, regardless of earnings, are required to pay the same fixed rate.
Regressive Tax - tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is generally a tax that is applied uniformly, which means that it hits lower-income individuals harder.
The affect that it has on income levels, is people like sales tax, in order to make them compare poorly with income tax in terms of their "fairness". The rationale is that individuals or families at the low end of the income spectrum spend a higher proportion of their income than those at the high end. Combined with the fact that sales tax is tied to consumption rather than income, this leads some to the conclusion that low-income individuals and families pay a greater proportion of their incomes in sales taxes, therefore sales tax is regressive.
Example -
if a person has $10 of income and must pay $1 of tax on a package of cigarettes, this represents 10% of the person's income. However, if the person has $20 of income, this $1 tax only represents 5% of that person's income.