Economics – The allocation of resources - Mixed economic system | e-Consult

Progressive Tax: A progressive tax is one where the tax rate increases as the taxable base (e.g., income) increases. This means higher earners pay a larger proportion of their income in taxes.

• Example: Income tax (most countries have a progressive income tax system).
• Economic Consequences: Can reduce income inequality by redistributing wealth. However, it may disincentivize high earners from working or investing, potentially reducing economic growth.

Regressive Tax: A regressive tax is one where the tax rate decreases as the taxable base increases. This means lower earners pay a larger proportion of their income in taxes.

• Example: Sales tax (VAT) – everyone pays the same percentage on purchases, regardless of income.
• Economic Consequences: Disproportionately affects lower-income households, potentially exacerbating income inequality. Can also discourage consumption by lower-income groups.

Proportional Tax: A proportional tax is one where the tax rate is the same for everyone, regardless of their income.

• Example: Capital gains tax (in some countries).
• Economic Consequences: Fairer than regressive taxes as it doesn't disproportionately affect lower earners. However, it doesn't address income inequality as effectively as progressive taxes.