Principles of Proportional,

Progressive & Regressive

Taxes
Unit 11 - Lesson 4

Learning outcomes:

Distinguish between progressive, regressive and proportional taxes providing

examples of each.
Calculate the marginal rate of tax and the average rate of tax from a set of
data.
Evaluate government policies to promote equity (taxation, government
expenditure and transfer payments) in terms of their potential positive and
negative effects on efficiency in the allocation of resources.

Proportional Taxation
Proportional Tax:
As income increases, the fraction of
income paid as taxes remains
constant; there is a constant tax
rate or percentage collected.
Also known as a Flat Tax
Examples:
Sales tax

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com/cimages/multimages/16/proportion
al-tax-code.jpg

Progressive Taxation
Progressive Taxation:

As income increases, the fraction of

income paid as taxes increases; there
is an increasing tax rate.
Percentage of tax paid increases as
income increases.

http://ctj.org/comic/progressivetax.jpg

Regressive Taxation
Regressive Taxation:
As income increases, the
fraction of income paid as taxes
decreases.
There is a decreasing tax rate.
http://study.
com/cimages/multimages/16/regressivetax-code.jpg

Summary:
Proportional, Regressive & Progressive:

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https://hyun0124.files.wordpress.
com/2010/08/tax-policies1.jpg

Effective Tax Rate

When Personal Income Taxes are Proportional,

a country can achieve some form of
Progressive taxation by offering exclusions.
An exclusion is the amount of income excluded
from being taxed.
Taxable income = Income - Excludable Amount
Showing Progressivity of a Proportional Tax
through the Effective Tax Rate

Effective Tax Rate = Dividing the amount of tax

by the total amount of income

http://www.mdmproofing.
com/iym/weblog/graphics/effective-tax-rateformula.gif

Calculating Effective Tax Rate

Assumptions:
1.
2.
3.

0 - $10,000 excluded from taxes

15% Proportional (flat tax rate)
Effective Tax Rate = Total Taxes Paid divided by Total Income
Income

Taxable Income

Amount of Tax

Effective Tax Rate

$10,000

$15,000

$5,000

$5,000 x .15 = $750

$750/$15,000 = 5%

$20,000

$10,000

$10,000 x .15 = $1,500

$1,500/$20,000 = 7.5%

$25,000

$15,000

$15,000 x .15 = $2,250

$2,250/$25,000 = 9%

Calculating Average Tax Rates

Average Tax Rate: All taxes paid including both direct and indirect taxes

Taxes paid divided by Total Income

Example: Calculating the Average Indirect Tax Rate

A family makes $100,000/year and spends $70,000 on goods and services
with an Indirect tax Rate of 10%.
Indirect Tax Family pays: $70,000 x .10 = $7,000
As a percentage of Income the Average Indirect Tax Rate for this family is:
$7,000 divided by $100,000 = .07 or 7%

Continuing further:
Suppose we know the Average Income Tax Rate and would like to calculate the
Total Average Tax Burden of the family.
Total Average Tax = Average Income Tax Rate + Average Indirect Tax
Rate
Assume the Average Tax Rate is 25% for the family.
Total Average Tax = 25% + 7%
32% Average Total Tax burden

Marginal Tax Rate

Marginal Tax Rate: Tax Rate paid on additional income
Progressive Income Taxes in the world today are calculated by applying different
tax rates to the different layers of income.
Assumption:
Income

Tax Rate

$0 - $10,000

0%

$10,001 - $25,000

10%

$25,001 - $50,000

15%

$50,001 - $75,000

25%

Calculating the Marginal Tax Rate

Income

Tax Rate

$0 - $10,000

0%

$10,001 - $25,000

10%

$25,001 - $50,000

15%

$50,001 - $75,000

25%

Calculate the total amount of tax paid on $65,000:

1.
2.
3.
4.

$10,000 x 0% = $0
$15,000 x 10% = $1,500
$25,000 x 15% = $3,750
$15,000 x 25% = $3,750

Total Tax Paid = $0 + $1,500 + $3,750 + $3,750

$9,000

Marginal Tax Rate

Average Tax Rate = $9,000 divided by $65,000

13.8%