Income Taxation Systems

Depending on which country we belong to, the income taxation system will either be Regressive, Proportional, or Progressive.

1.) Regressive

In a regressive system of taxation, not to be confused with a regressive tax, the tax rate decreases as the taxpayer's income increases. While this may sound unjust on paper, it is actually quite good. In a regressive system of taxation, hardworking people are actually rewarded by paying less taxes while lazy people are punished by paying more taxes. If a person works hard, he gets a pay raise, a promotion, or both. In a regressive system, he is also rewarded with a lower tax bracket. The goal of a regressive system is to encourage productivity and economic growth.

2.) Proportional

Here there is only one tax rate, a certain percentage. By paying a single rate of tax, it becomes less bothersome for the taxpayer. Countries that use this system of income taxation keep the rate low. The end result here is that although the tax is low, there are enough taxpayers to pay it. By keeping taxes low, the government encourages productivity and economic growth while keeping the collection of taxes constant.

The above two systems are in place in many countries with strong economies. Now, we come to the third.

3.) Progressive

The idea behind this system is that people with higher incomes should pay more taxes than those with low incomes. Social justice, supposedly, is the aim of this taxation system. In practice, it isn't. In this system when a person's income increases, his tax bracket also increases. The result is that many people living in countries with this system look for ways to defeat the tax system. Contrary to the claims of its proponents the progressive system of taxation has only increased the number of tax evaders and, in some countries, hampers economic growth because less productive people are rewarded with lower tax rates while hardworking ones are penalized with higher tax rates. This is the system followed in the United States and the Philippines.