Fiscal Policy - Progressive, Proportional and Regressive Taxes

A revision note on the effects of taxes on households of different incomes.

Revision Video: Progressive and Regressive taxation

Progressive taxes

With a progressive tax, the marginal rate of tax rises as income rises. I.e. as people earn extra income, the rate of tax on each additional pound goes up. This causes a rise in the average rate of tax.

Examples: Income tax (basic and higher rates)

Proportional taxes

With a proportional tax, the marginal rate of tax is constant leading to a constant average rate of tax

Examples: National insurance contributions (NICs)

Regressive taxes

With a regressive tax, the rate of tax paid falls as incomes rise – I.e. the average rate of tax is lower for people on higher incomes

Examples: Excise duties on tobacco and alcohol