Difference between Progressive Tax and Proportional Tax

Taxation is one word which ignites the same feeling in the minds of all individuals and that feeling is that of hatred as no one likes to pay too much taxes on his or her hard-earned income, however, no matter how much you hate taxation you will have to pay tax to the government by doing proper tax planning and that is the reason why today we will not be talking about ways to evade tax rather we will focus on types of taxes. Progressive taxation and proportional taxation are two types of income tax, in order to understand more about these terms one should look at the difference between the progressive tax and proportional tax –

Progressive Tax VS Proportional Tax

Meaning

Progressive taxation refers to that system of taxation in which as the income of the individual increases he or she will have to pay more taxes, in simple words the richer you get the more taxes you have to pay while proportional taxation refers to that system of taxation where tax rate is same for all kinds of taxpayers irrespective of their income, in simple words rich as well as poor will pay the tax at the same rate. In simple words tax rate in case of progressive taxation is different for different category of people while in case of proportional taxation tax rate is the same for all categories of people.

Example

In case of progressive tax suppose the government has decided that if your annual income is less than $100000 than you will pay 10 percent income tax and people having more than $100000 annual income will pay 20 percent income tax and so on. While in case of proportional taxation if your annual income is $10000 or $500000 you have to pay tax at a flat rate which maybe 10 or 20 percent.

Happy People

In case of progressive tax poor and middle class people are happy because they have to pay tax at lower rate as their income is low and it is the rich people who are unhappy with this system of taxation while as far as proportional taxation is concerned it is the rich people who are happy as they have to pay tax at same rate as poor or middle-class people and it is the middle and poor class people who are unhappy with proportional taxation system.

Simplicity

The progressive taxation system is complex in the sense that it involves different tax rate for different income which makes the calculation and assessment part tricky but in case of proportional taxation due to presence of one rate only it is easy both for taxpayers as well as income tax authorities.

Income Tax Base of People

In case of progressive tax, a small group of people pay a larger share of taxes to the government but as far as proportional taxation is concerned the tax is equally divided between large numbers of people.

As one can see from the above that there are many differences between both type of taxes and that is the reason why any government should first carefully analyze the pros and cons of both types of taxes and then decide whether to implement progressive tax or proportional tax if the government has a choice between the two taxations.