Question

With reference to the taxation policy, differentiate between 'progressive' and 'regressive' taxes giving an example for each.

Answer 1

Progressive taxes: A tax is called progressive when the rate of taxation increases as the taxpayer's income increases, i.e. the higher the income, the higher is the rate of tax. For example : a person earning an income of Rs 5 lakh a year may be taxed at the rate of 20%.
Regressive taxes: A regressive tax is one in which the rate of taxation decreases as the taxpayer's income increases. In this system the rate of tax falls with increase in income. For ex. income of Rs 5 lakh a year may be taxed at the rate of 20% and income of 10 lakh a year may be taxed at the rate of 20%.