The World’s Taxation Systems: Proportional, Progressive, Digressive and Regressive

Vertical equity states that individuals in different income brackets should pay different tax rates. While it is designed to promote fairness, this concept does not always protect the best interests of low-income earners. Let us explore the logic behind the different taxation systems to better understand this matter.

Fortunly describes in its infographic that a proportional taxation system is all about taxing uniformly. Clearly, that disregards income inequalities among taxpayers, which can vary greatly from country to country.

Convenience is one of the main reasons why a government decides to institutionalize proportional taxation. Levied the same way, proportional taxes are easy to calculate and manage. Since the nature of this taxation system is flat and constant, more people find it desirable because it allows all earners to carry “equal” tax liabilities.

Progressive taxation aims to take away more money from richer individuals. It is more equitable and is easier to justify, since it impacts taxpayers that tend to have more income surpluses. Progressive taxation may appear like it discourages people from working harder to avoid getting taxed more, but it actually gives low earners some financial relief.

Digressive taxation is mildly progressive. It may raise the tax rate more quickly than the tax base, but the hike stops upon reaching a certain limit. In other words, it eventually becomes flat, so higher earners don’t have to keep paying like in a purely progressive taxation system.

Regressive taxation is the opposite of progressive wherein the tax rate drops as the tax base goes up. The Social Security and property taxes in America are regressive, and the excise taxes and user fees are somewhat also of this nature because they are independent of a taxpayer’s income.

They are designed as such to counterbalance progressive income taxes, thus, in the Internal Revenue Service’s book, ultimately promoting the spirit of proportional taxation.

Each taxation system has its advantages and disadvantages. Which one do you have? Check out the infographic below to learn more about how different countries around the world tax incomes and assets.