Progressive taxation is a system in which the tax burden increases proportionally with an individual's or entity's income or wealth. Under progressive taxation, those with higher incomes are taxed at higher rates, while those with lower incomes are taxed at lower rates. This principle aims to distribute the tax burden more fairly by placing a higher burden on those who can afford it more easily.
Regressive taxation, on the other hand, is a system where the tax burden falls disproportionately on those with lower incomes or wealth. With regressive taxation, the tax rate decreases as income or wealth increases. This means that individuals or entities with lower incomes pay a higher proportion of their income in taxes compared to those with higher incomes.
In essence, progressive taxation is designed to achieve a more equitable distribution of the tax burden by taxing the wealthier individuals at higher rates, while regressive taxation exacerbates income inequalities by placing a heavier burden on lower-income individuals.
Additionally, progressive taxation is often associated with the idea of "ability to pay." It recognizes that individuals with higher incomes have a greater ability to bear the burden and contribute more towards the common good. This approach is based on the principle of vertical equity, where the tax system aims to reduce income inequality and provide social welfare.
Regressive taxation, on the other hand, can have a disproportionate impact on lower-income individuals, as they are forced to allocate a larger percentage of their income towards taxes. This approach may exacerbate income inequality, as lower-income individuals have less disposable income available for their daily needs and savings. It is often viewed as less fair because it places a greater burden on those with limited financial resources.
Overall, the difference between progressive and regressive taxation lies in how the tax burden is distributed across income or wealth levels. Progressive taxation aims to achieve greater income equality and social welfare by taxing higher incomes at higher rates, while regressive taxation can result in a disproportionate burden on lower-income individuals and exacerbate income inequality.