Progressive, proportional and regressive taxes

Overview

Recall questions on the three tax structures, direct against indirect taxes, and how tax rates affect incentives to work.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is a progressive tax?

   Model answer

   A tax where the proportion of income paid in tax increases as income rises.

2. 2

   Define a proportional tax.

   Model answer

   A tax where the proportion of income paid in tax remains constant regardless of income level.

3. 3

   What is a regressive tax?

   Model answer

   A tax where the proportion of income paid in tax decreases as income rises.

4. 4

   What are direct taxes and how are they paid?

   Model answer

   Taxes levied on income, wealth or profit that are paid directly to the government by the taxpayer.

5. 5

   Define indirect taxes.

   Model answer

   Taxes levied on expenditure that are collected by an intermediary from the consumer.

6. 6

   How might higher marginal direct tax rates affect work incentives?

   Model answer

   They may reduce incentives to work by lowering the net return to additional hours of labour.

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