IBonomicsTypes of Taxes – Progressive, Regressive, and ProportionalSL
MacroeconomicsThis diagram compares three tax systems by showing how total tax payments change as gross income rises. The shape of each line shows whether tax payments increase at a constant rate, faster than income, or slower than income. This helps illustrate how the tax burden is shared across low and high income earners in proportional, progressive, and regressive tax systems.
Curves and elements
- proportional
- Proportional tax line: A straight line showing total tax rises at a constant rate as income increases.
- progressive
- Progressive tax line: A curve that becomes steeper, showing total tax rises faster at higher income levels because the average tax rate increases.
- regressive
- Regressive tax line: A curve that becomes flatter, showing total tax rises more slowly at higher income levels because the average tax rate falls.
Key explanations
- 1
Proportional tax means the tax rate is constant for all income levels. As income rises, total tax paid rises in a straight line, and everyone pays the same percentage of their income in tax.
- 2
Progressive tax means the average tax rate rises as income rises. Higher income earners pay a larger percentage of their income in tax, so total tax paid increases more than proportionally as income increases.
- 3
Regressive tax means the average tax rate falls as income rises. Lower income earners pay a larger percentage of their income in tax, so total tax paid increases less than proportionally as income increases.
- 4
The diagram focuses on total tax payments, but the key IB idea is how the average tax rate changes with income in each system.
- 5
Progressive taxes are commonly used to reduce income inequality, while regressive taxes can increase inequality if they take a larger share from low income households.
Example exam question
Using the diagram, explain the difference between progressive and proportional taxes.
Show example answer
A proportional tax has a constant tax rate, so everyone pays the same percentage of their income and total tax rises in a straight line as income increases. A progressive tax has an increasing average tax rate, so higher income earners pay a larger percentage of their income and total tax rises faster as income increases. This is why the progressive line becomes steeper at higher income levels.
