- 5 Marks
Question
A tax may be described in a number of ways based on the relationship between income earned by a person and the tax rate applicable to that income. Again, an important feature of a tax system is the percentage of the tax burden relative to income or consumption, thus, the terms progressive, proportional, and regressive are used to describe the way the rate of tax progresses from low to high; from high to low or proportionally.
Required:
In relation to the scenario above, explain progressive, proportional, and regressive taxes, stating the main features that distinguish them. (5 marks)
Answer
- Progressive Tax:
This tax regime involves the ratio of tax liability to income rising as income increases. A greater percentage of income is taxed as income rises, meaning higher earners pay a higher tax rate. This system helps in redistributing income, ensuring that the rich bear more tax than the poor. An example is the graduated tax rate applicable to individuals in the First Schedule of the Income Tax Act, 2015 (Act 896) as amended. - Proportional Tax:
In a proportional tax system, the effective tax rate remains the same irrespective of income level. Both the rich and the poor are taxed at the same percentage of their income or expenditure. - Regressive Tax:
In a regressive tax system, the tax ratio decreases as income increases. This system places a smaller tax burden on higher-income earners compared to lower-income earners. It is generally seen as inequitable and indirect taxes like VAT are often regressive.
- Tags: Income Tax, Progressive Tax, Proportional Tax, Regressive Tax, Tax Types
- Level: Level 2
- Topic: Overview of the Ghanaian Tax System and Fiscal Policy
- Series: MAR 2024
- Uploader: Theophilus