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.
Distinguish between progressive, regressive and
proportional taxation.
Proportional Tax: as income increases, the fraction (percentage)
of income paid as taxes remains constant.

Income Tax Rate Amount of tax

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

$20,000 15% $20,000 x .15 = $3,000

$30,000 15% $30,000 x .15 = $4,500

Distinguish between progressive, regressive and
proportional taxation.
Progressive Taxation: as income increases, the fraction (percentage) of
income paid as taxes increases; there is an increasing tax rate.

Income Tax Rate Amount of Tax

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

$20,000 20% $20,000 x .20 = $4,000

$30,000 25% $30,000 x .25 = $7,500

Distinguish between progressive, regressive and
proportional taxation.
Regressive Taxation: as income increases, the fraction (percentage) of
income paid as taxes decreases; there is a decreasing tax rate.

Income Tax Rate Amount of Tax

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

$20,000 10% $20,000 x .10 = $2,000

$30,000 5% $30,000 x .25 = $1,500

Why indirect taxation is regressive
Indirect taxes are considered Regressive Taxes. Why? Consider this:

Individual A: Individual B:
Income: $100,000 Income: $50,000
Buys car: $20,000 Buys car: $20,000
Indirect tax: 20% Indirect tax: 20%
Total tax paid: $4,000 Total tax paid: $4,000

The fraction (percentage)of income The fraction (percentage) of income

paid as tax is 4%. paid as tax is 8%.

Indirect taxes are regressive because households with less income pay a greater
percentage of their income on taxes. Individual B paid 8% vs. Individual A 4%
Individual B: Calculated by $4,000 divided by $50,000 times 100 will give you the percentage of income
paid as tax.
Progressive Taxes & Lorenz Curve
The more progressive the tax system,
the more equal the distribution of
income.

Allows governments to redistribute more

income:

● Transfer payments
● Subsidization of Merit goods

Shifts the Lorenz Curve inwards

illustrating a more equal distribution of
income.
Proportional, Regressive Tax & Lorenz Curve
The more regressive the tax system tends
to make the distribution of income less
equal.

Less money to the government so there is

less money to redistribute.

● Decrease in transfer payments

● Less money to subsidize Merit goods

Shifts the Lorenz Curve outward

illustrating a more equal distribution of
income. (A to B)
Calculate the marginal rate of tax and average rate
of tax from a set of data.
Income Tax Rate Calculate the total amount of tax paid on $65,000:
$0 - $10,000 0%
Calculations:
$10,001 - $25,000 10%
1. $10,000 x 0% = $0
2. $15,000 x 10% = $1,500
$25,001 - $50,000 15%
3. $25,000 x 15% = $3,750
4. $15,000 x 25% = $3,750
$50,001 - $75,000 25%
Total Tax Paid = $0 + $1,500 + $3,750 + $3,750
Marginal Tax Rate = 25%
$9,000
Average Tax Rate or Effective Tax Rate
The effective tax rate is the average taxation rate which income earned is taxed.

Formula:
Effective Tax Rate = Total Tax Paid divided by the amount of income.

Previous slide:
Effective (Average)Tax Rate = 13.8%
Effective Tax Rate = $9,000 x 100
$65,000

The previous household making $65,000 had a Marginal Tax Rate of 25% and
an Effective (Average) Tax Rate of 13.8%.