Types of Taxation Systems
There are three main ways governments can structure their tax systems, each affecting people differently based on their income levels. Progressive tax means the wealthy pay a higher percentage - like income tax where higher earners face steeper rates. Regressive tax hits lower earners harder proportionally, with VAT being a prime example since everyone pays the same rate regardless of income.
Proportional taxation keeps things simple by taking the same percentage from everyone, like corporation tax. The key distinction between direct taxation (taken straight from your earnings) and indirect taxation (paid by businesses selling goods) helps explain who technically pays what.
When governments increase income tax rates, expect a mixed bag of consequences. Higher revenues sound great, but you'll also see more tax evasion and people losing motivation to work harder. The Laffer Curve suggests there's a sweet spot - beyond a certain point, higher tax rates actually reduce total revenue because people stop working or start dodging taxes.
Key Insight: The Laffer Curve shows that maximum tax revenue doesn't come from maximum tax rates - there's an optimal balance point.
Raising indirect taxes creates cost-push inflation and reduces economic output. It's also regressive, meaning it unfairly burdens lower-income families who spend a larger proportion of their earnings on taxed goods.