Published by Patrick Mutisya · 14 days ago
Identify and give examples of the different classifications of tax:
Taxes can be grouped according to how the tax rate changes with the amount of income or expenditure.
A progressive tax takes a higher percentage of income from those who earn more. The tax rate rises as the taxable base increases.
| Income Bracket | Tax Rate |
|---|---|
| £0 – £12,570 | 0 % |
| £12,571 – £50,270 | 20 % |
| £50,271 – £150,000 | 40 % |
| Over £150,000 | 45 % |
Example: In the UK, income tax is progressive – a person earning £30,000 pays a lower average rate than someone earning £120,000.
A regressive tax takes a larger percentage of income from low‑income earners than from high‑income earners. The effective rate falls as income rises.
Typical examples are taxes on consumption such as sales tax or value‑added tax (VAT) when applied uniformly to all purchases.
Effective tax rate calculation:
\$\text{Effective rate} = \frac{\text{Tax paid}}{\text{Income}} \times 100\%\$
A proportional tax applies the same rate to all levels of income or expenditure.
| Tax Base | Flat Rate |
|---|---|
| All taxable income | 15 % |
| Corporate profits | 15 % |
Example: A 15 % flat income tax on all earnings, regardless of amount, is a proportional tax.
Taxes are also distinguished by who directly bears the legal responsibility to pay them.
Paid directly to the government by the individual or organisation on whom the tax is levied.
Collected by an intermediary (e.g., a retailer) from the consumer and then passed to the government.
| Classification | Definition | Typical Examples |
|---|---|---|
| Progressive | Rate increases with the tax base | Income tax (UK), US federal income tax |
| Regressive | Effective rate falls as the tax base rises | Uniform sales tax, VAT on essential goods |
| Proportional | Same rate for all levels of the tax base | Flat‑rate income tax, corporate tax at a single rate |
| Direct | Legal liability rests with the person/entity taxed | Income tax, corporation tax |
| Indirect | Collected from a third party and passed on | VAT, excise duties, customs duties |