A revision note on the effects of taxes on households of different incomes.
Revision Video: Progressive and Regressive taxation
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)
With a proportional tax, the marginal rate of tax is constant leading to a constant average rate of tax
Examples: National insurance contributions (NICs)
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
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