Explain each of the following types of taxes: (a) Proportional tax; (b) progressive tax; (c) regressive tax.

Answer Details

These terms describe how the rate of tax changes as a taxpayer's income (the tax base) rises.

• (a) Proportional tax: the same percentage rate is charged on every income, so the tax paid rises in exact proportion to income. If the rate is 10%, a person earning \(N100{,}000\) pays \(N10{,}000\) and a person earning \(N200{,}000\) pays \(N20{,}000\); the burden as a fraction of income stays constant.
• (b) Progressive tax: the rate rises as income rises, so higher-income earners pay a larger percentage of their income than lower-income earners. For example, the first band may be taxed at 7%, a higher band at 15%, and so on. It is used to redistribute income and reduce inequality.
• (c) Regressive tax: the rate falls as income rises, so lower-income earners pay a larger percentage of their income than higher-income earners. A flat sum, such as a poll tax or an indirect tax on a necessity, takes a bigger fraction of a poor person's income than of a rich person's income.

The key contrast is what happens to the average rate of tax as income grows: it stays the same (proportional), rises (progressive), or falls (regressive).