Progressive, Proportional, Regressive and Degressive Taxation

Different taxes are imposed by the government because a government has to pursue different objectives. For example, at times a government may need to encourage production and consumption of some commodities. Redistribution of income among different section of the society may be another objective of taxation. In pursuance of these objectives, a government imposes taxes at different rates on different commodities and different groups of persons. For example, a person who earns Rs. 3 lakh a year pays income tax at the rate of 10% of his taxable income. On the other hand a person who earns Rs. 10 lakh a year pays income tax at the rate of 30% of his taxable income.

• On the basis of the rate of taxation the different taxes can be classified into four categories as:

1. Progressive taxation,
2. Proportional taxation,
3. Progressive taxation, and
4. Degressive taxation.

Progressive taxation

In a progressive tax system the rate of tax increases as the tax base increases. That is, persons with higher income of wealth not only pay more tax, they pay tax at a higher rate.

From this, we calculate the tax liability of A, B and C who have annual incomes of ₹1 lakh ₹2 lakh and ₹3 lakh respectively this is shown below:

Thus, A pays a total tax of ₹10,000 on an income of ₹1 lakh, whereas C pays a tax of ₹60,000 on an income of ₹3 lakh.

Proportional taxation

In a proportional tax system, the rate of tax remains the same at different tax bases. Suppose, India adopts a proportional income tax system. Every individual is required to pay tax at the rate of 10% of his income. We estimate the tax liability at different levels of income as follows:

We notice the amount of tax to be paid goes on increasing but the rate at which the tax is paid remained unchanged.

Regressive Taxation

In a regressive tax system, the rate of tax falls as the tax base increases.

In this case we find that

• the amount of tax to be paid increases and,
• the rate at which tax is to be paid falls.

A regressive tax is one in which the rate of taxation decreases as the taxpayer’s income increases.

Digressive Taxation

In a digressive tax system, the tax increases with an increase in tax base but the rate of increase of tax diminishes with every increase in the tax base.

• Rate of tax increases.
• Amount of tax increases.
• Rate of increase in tax rate falls.

Progressive taxation is based on the principle of ‘ability’-to-pay, i.e., those who earn more should pay more to the government. It helps the government in redistribution of income from rich to poor.