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Economics explained

Category:

microeconomic policies

Relationship between taxes and income

Relationship between taxes and income

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The relationship between taxation and income varies for different types of tax. Three relationships can be identified:

Proportional taxes

Proportional taxes, whereby as income rises, the proportion of income paid in tax remains the same; the tax rate is therefore constant. An example ·would be a flat rate sales tax.








Irrespective of the income level (Y1 or Y2) the same level of tax is charged.

Progressive taxes

Progressive taxes are those that when income rises, the proportion of the total paid in taxes increases; the average rate of taxation will therefore be lower than the marginal rate. Examples of progressive taxation are income tax, capital gains tax and stamp duty.








As the level of income increases from Y1 to Y2, the rate of tax rises from T1 to T2

Regressive taxes

Regressive taxes are those that as income rises, the proportion of total income paid in tax falls.. For example, although a high-income earner pays the same amount of television licence fee as a less wealthy person, the amount of tax paid is a smaller proportion of the wealthier person's income.







With a specific amount of tax paid, high income earners (those at y2) pay a smaller proportion of tax (t2) than low income earners (those on y1 who pay T1)

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