To reduce the incidence of poverty and achieve a more equitable distribution of income by using fiscal measures, particularly progressive taxation.
What is Progressive Taxation?
A progressive tax system imposes a higher tax rate on higher income brackets. The tax liability increases at a faster rate than the increase in income, meaning that the average tax rate rises as income rises.
How Progressive Taxation Works
Define income brackets (e.g., low, middle, high).
Assign a marginal tax rate to each bracket, with rates rising for higher brackets.
Calculate tax payable by applying each rate to the portion of income that falls within its bracket.
For example, if the tax brackets are:
0 % on income up to $10,000
10 % on income between \$10,001 and \$30,000
20 % on income between \$30,001 and \$70,000
30 % on income above $70,000
The tax payable by an individual earning $85,000 would be calculated as:
\$\$
\begin{aligned}
\text{Tax} &= 0\% \times 10{,}000 \\
&\;+\;10\% \times (30{,}000-10{,}000) \\
&\;+\;20\% \times (70{,}000-30{,}000) \\
&\;+\;30\% \times (85{,}000-70{,}000) \\
&= 0 + 2{,}000 + 8{,}000 + 4{,}500 = \$14{,}500
\end{aligned}
\$\$
Advantages of Progressive Taxation
Reduces income inequality by redistributing wealth from higher‑income earners to lower‑income groups.
Provides the government with a larger revenue base to fund public services (education, health, social security) that benefit the poor.
Can act as an automatic stabiliser: tax receipts fall during recessions when incomes drop, leaving more disposable income in the hands of consumers.
Disadvantages of Progressive Taxation
May discourage investment and work effort among high‑income earners if rates are perceived as too high.
Complexity in administration and compliance, leading to higher administrative costs.
Potential for tax evasion or avoidance, especially in economies with weak enforcement.
Comparison with Other Tax Structures
Tax Type
Rate Structure
Impact on Income Distribution
Typical Use
Progressive
Higher marginal rates for higher income brackets
Reduces inequality
Income tax, estate tax
Proportional (Flat)
Same rate for all income levels
Neutral – does not change inequality
Sales tax, some corporate taxes
Regressive
Effective rate falls as income rises (e.g., indirect taxes)
Increases inequality
Excise duties, payroll taxes
Key Policy Considerations for Implementing Progressive Taxation
Bracket Design: Choose income thresholds that reflect the cost of living and poverty lines.
Rate Setting: Balance revenue needs with incentives for work and investment.
Administration: Ensure a transparent, efficient tax collection system to minimise evasion.
Use of Revenue: Allocate funds to programmes that directly benefit low‑income households (e.g., cash transfers, subsidised education).
Monitoring & Evaluation: Regularly assess the impact on poverty rates and adjust brackets or rates as needed.
Suggested Diagram
Suggested diagram: A Lorenz curve illustrating how progressive taxation shifts the curve closer to the line of equality, reducing the Gini coefficient.
Summary
Progressive taxation is a central tool for governments aiming to alleviate poverty and achieve a more equitable income distribution. By taxing higher incomes at higher rates, the state can generate revenue for social programmes that directly support the poor, while also moderating income inequality. However, careful design and administration are essential to avoid negative side‑effects such as reduced incentives for work and investment.