Introduction to Income Distribution

Indirect Taxes or Expenditures Taxes or Consumption Based Taxes

• In a sense these taxes are avoidable, as consumers have the choice as to whether to buy the goods or not and in what quantities.
• Governments may vary the rate of indirect tax they charge on different goods and services, with necessity and valued goods such as food in supermarkets, being charged at a lower tax rate than luxuries, such as food in restaurants.
• Alternatively, they may treat all goods the same.

Direct Taxes and Indirect Taxes Further Classification

There are three different categories

into which we can place direct and

indirect taxes.

• Progressive Taxes
• Regressive Taxes
• Proportional Taxes

Progressive Taxes

• Many countries use a progressive tax as the main way to redistribute income from higher income earners to lower income earners.
• A progressive tax means that as incomes rise, people pay a higher proportion of this income in taxes.
• Usually there is a certain amount of income that is not taxed at all.
• However, when the income moves beyond the minimum, then a certain percentage of the income will have to be paid to the government.
• Then as income rises further, a progressive tax would take a larger percentage at higher incomes.

Progressive Income Tax Example

Taxable Income	% to be paid as tax
0 - $10,000	0
10,001-25,000	30
25,0001-50,000	40
50,001 and higher	50

If a person were to earn $15,000, then they would pay no taxes on the first $10,000 and 30% on the next $5000 so they would pay $1500 in taxes. This represents an average tax of 10%. As we can see from this table, the average tax rises as income rises, making it a progressive tax.