# Economics Part A

## Progressive Taxation, Regressive Taxation and Flat Tax

Progressive Taxation, Regressive Taxation and Flat Tax

Progressive taxation

A progressive tax increases as a person’s income rises. The next example uses the following salary and tax information:

1. There is no tax assessed on salaries below \$2,000 per month, so the tax rate is 0%.
2. The tax rate on salaries between \$2,000 and \$3,000 a month is 10%.
3. The tax rate on salaries between \$3,000 and \$4,000 is 20%.

Every income segment, with its related tax rate, is called a tax bracket.

Example

If Mr. Longfellow earns \$3,500 a month, then he will pay \$200 in tax as the following calculation shows:

 Segment of income According to tax bracket Tax rate Total tax First \$2,000 Next \$1,000 Next \$500 0% (first bracket) 10% (second bracket) 20% (third bracket) \$0 \$100 \$100 Total income:  \$3,500 Total tax: \$200

In most countries of the world, income tax is progressive.

A progressive income tax system decreases income inequality, and lowers the country’s Gini index.

Regressive taxation

A regressive tax decreases as a person’s income increases (in other words, people in higher tax brackets pay a lower tax rate).

Flat tax

A flat tax levies the same rate upon everyone regardless of income level (i.e., there is only one tax bracket).

A head tax is a fixed tax imposed equally upon all citizens of a country. Even those earning no income whatsoever must pay this tax. This type of tax was common in ancient times.

Disposable Income

The disposable income of a household is the amount of money left over after paying income taxes.

Disposable income is used for two purposes:

consumption and savings. As disposable income increases, the proportion of income directed towards consumption usually falls, and the proportion invested as savings increases.

Example

The Peterson family uses its disposable income as follows:

• The first dollar of income is used entirely for consumption, while nothing is set aside for savings.
• The 1,000th dollar is divided as follows: \$0.70 for  consumption, and \$0.30 for savings.
• The 2,000th dollar is divided as follows: \$0.60 for consumption, and \$0.40 cents for savings.
• The 3,000th dollar is divided as follows: \$0.50 cents for consumption, and \$0.50 for savings.
• The 15,000th dollar is divided as follows: \$0.20 cents for consumption, and \$0.80 cents for savings.

The 20,000th dollar is deposited as savings.

Progressive Taxation, Regressive Taxation and Flat Tax554