Income tax filing is something that everyone is generally aware of. However, knowing the complexities and application of taxes is critical in real life. Examining various tax categories and how they affect companies and people is important.

This blog will discuss the varied facets of income tax. We will walk you through all you need to know about what makes an income tax progressive, regressive or proportional so that you have a complete view and understanding.

So, let’s begin!

What Makes Income Tax Progressive?

A progressive tax system assesses tax amounts depending on an individual’s income. High-income earners pay more than low-income earners, with income tax rates and liabilities rising as wealth grows. The premise is that high-income people can afford to pay more taxes and should do so to ease the burden on low-income earners.

The federal income tax system in the United States, UK, India & Canada is progressive. Using marginal tax rates, higher-income earners are projected to pay more in income tax than lower-income earners, depending on their income tax bands.

What Makes Income Tax Regressive?

Low-income earners pay more taxes than high-income earners under a regressive tax system – proportional to income. In a regressive system, you calculate income tax as a proportion of the cost of an item acquired or possessed by the taxpayer.

Income levels or wages do not determine the taxes levied; everyone pays the same percentage of taxes for the same commodity.

Regressive taxation is utilized for property taxes, sales taxes on products, and excise taxes on consumables such as travel and fuel in the United States, the United Kingdom, India, and Canada. Sin taxes are a kind of excise tax levied on goods claimed to have a detrimental or ill impact on society, such as cigarettes and gambling, which are also susceptible to regressive taxation.

Many feel that this is unjust and disproportionately affects low-income earners. Cigarettes, for example, are subject to a federal excise tax of $1.01 per pack in the USA.

What Makes Income Tax Proportional?

Everyone pays the same percentage of their yearly income under a proportional tax system. The set income tax rate is unaffected by changes in income. If the flat rate is 5%, someone making $25,000 pays $1250 in income taxes, while someone earning $250,000 pays $12,500.

In the USA, the states of Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah now employ a proportional tax system for state income tax e-filing.

How Do These Various Taxes Work?

Every tax operates a little differently. Regressive taxes often depend on the value of anything you buy or possess. Your income only sometimes determines the exact percentage you pay.

Unlike regressive taxes, proportional and progressive taxes are generally decided by your income. When individuals and companies file income tax returns each year, they utilize their net income and the tax rates specified under respective countries to calculate the total amount of taxes owed.

When buying goods and services, everyone pays indirect taxes like GST. The GST is a consumption tax. Thus the poorer you are, the more you will spend on GST in India, the US, the UK, and Canada.

What Are the Advantages & Disadvantages of Progressive, Regressive, Or Proportional Income Tax?

There are several reasons in favor of and against all these taxes. Here’s a quick overview of the same –

Progressive Taxation

Advantages:

• Progressive taxation decreases tax burdens on the poor. Low-wage people have more money to spend on necessities, which boosts the economy.
• Since the wealthiest pay the most taxes, progressive taxes gather more than flat or regressive taxes.
• A progressive tax also forces the wealthiest to pay more for public safety and road repair, which all people and companies depend on.

 Disadvantages:

• Progressive taxes discourage success. 
• They also resist wealth redistribution, which they say unjustly penalizes the rich, affluent, and middle class.

Regressive Taxation

Advantages:

• Regressive taxes are simpler to manage and compute.
• As a result of their perceived fairness, regressive taxes may have more political support.
• When compared to progressive taxes, regressive taxes may have less impact on the economy.

Disadvantages:

• Tax policies that adopt unfair distribution throughout the population may exacerbate economic disparities.
• Regressive taxes tend to hit those with the lowest incomes the hardest.
• Reduced economic activity may result from persons avoiding regressive taxes that cut into their disposable income.

Proportional Taxation

Advantages:

• Everyone pays taxes at the same rate. And thus, there is no uncertainty about the rate of taxation.
• Proportional tax lowers tax theft from affluent people because when tax rates are high for the rich and low for the middle and poor, the rich strive to avoid paying taxes.
• A proportional tax is easy to grasp for both tax authorities and taxpayers, which improves implementation and acceptability.

Disadvantages:

•  This system keeps tax rates the same for everyone, which frustrates and angers the majority of the nation’s people, which is 99 percent middle and poor class.
• The proportional tax creates a wide disparity between rich and poor, which may lead to resentment, dissatisfaction, and even rebellion by the middle and low-income classes against the rich and authority.
• The government gets less tax since they must maintain the low tax rate to please the poor and middle class, which lowers the tax rate for the affluent and reduces government income.

Bottom Line

A progressive income tax is a tax system that levies a greater rate on those with higher earnings. A regressive income tax taxes persons with lower earnings more heavily. In contrast, a proportionate income tax is a tax system in which all income levels are taxed at the same rate.

We are optimistic that you have a fair idea of these three kinds of taxation systems after reading this blog. However, if you have more queries regarding progressive, regressive & proportional tax, you should connect with experts like GJM & Co. Our experts will sit with you and explain to you everything there is to understand.

Should you have any queries or need consultation, Schedule a Call today or write to us at info@gjmco.in.