Manon's Econ Blog

Progressive and Regressive taxes

Posted on: August 30, 2010

With the use of examples, explain the difference between a progressive tax and a regressive tax. (200-300 words)
Proportional is a straight line, because proportional means that the fraction of income paid as taxes same the same, so the line in is a 45° angle. However, some people agree that richer people should pay more, while some other say that they should pay less. Therefore there are two other types of taxes: progressive and regressive.
Progressive taxes are so called when the fraction of income paid as taxes increases at the income increases. For example, the person earning 10 thousand dollars a year will pay only 10% of taxes, while the person earning a million dollars a year will pay 20% of taxes. The fraction is not fixed, therefore as income increases the fraction increases, and the curve on the graph is higher than the proportional one.
Regressive taxes are a quite strange concept, as it implies that the more money someone earns the smaller fraction of it he has to pay as taxes. In that case, the 10 thousand dollars person will pay 20% of it as taxes, while the million dollars person will only pay 10%. The fraction is not fixed, but as income increases it decreases, and the curve on the graph is lower than the proportional one.

On the graph, we can really see that with progressive taxes, as income increases taxes increases while with regressive taxes as it increases taxes decreases. The “fairness” of each of them is nevertheless unsure.

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