- 5 Marks
Question
When introducing new taxes in a developing economy like Ghana, the contribution of the new tax system to the tax buoyancy of the country is important. However, this will depend on whether the new tax instrument will be a progressive tax or a regressive tax.
Required:
Explain the difference between progressive tax system and regressive tax system and state ONE (1) example of each tax instrument.
Answer
Progressive Tax:
This is a tax regime where the tax liability to income or other tax base rises as income increases. In simple terms, the higher the income of a person, the higher the tax liability. A typical example is the graduated rate of tax applicable to individuals in the Income Tax Act, 2015 (Act 896).
Regressive Tax:
In contrast, a regressive tax system sees the tax ratio fall as income increases, meaning it exacts a smaller percentage of tax as income rises. It affects the poor more than the rich. An example of a regressive tax system is VAT, CST, or excise duty.
- Tags: Examples of Taxation, Progressive Tax, Regressive Tax, Tax Systems
- Level: Level 2
- Topic: Overview of the Ghanaian Tax System and Fiscal Policy
- Series: MAR 2023
- Uploader: Kwame Aikins