Understanding Economics: The Four Tax Systems and Methods of Calculation
The proportional tax system is a method used in which the average tax rate is the same no matter how much a person earns. For example, if the government decides that the tax rate is 30% of earned income, and no matter how much a person earns, he or she must pay 30%. This number does not increase or decrease depending on whether a person hits a certain income level or not.
The regressive tax system is a method used in which the average tax rate decreases as the amount of income earned by person increases. This type of tax system is favored by the wealthy, as they actually have to pay less tax if they earn a lot of money. Unlike proportional tax system, the amount of tax person pays decreases when they hit certain income levels. For example, a person may have to pay 30% of their earned income up to the first hundred thousand dollars, but every dollar after that the tax rate might decrease only 20%.
The progressive tax system is a method used in which the average tax rate increases as income increases. It is the opposite of the regressive tax, so instead of paying less for additional income earned, a person has to pay more of their earned income in taxes. For example, the tax rate might be 30% up to the first hundred thousand dollars, but for every dollar after that the rate might increase to 40%.
Finally, the lump tax system is a method used in which every person in the country pays the same amount of total tax. For example, every citizen of a nation might have to pay $5000 every year. It does not matter how much income a person generates, as they only have to pay the lump sum. While this is a very efficient type of tax system, it is not a very fair one.
Source:
Jameson, George. Lecture: Economics. December 2, 2009
Published by John Smith
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