Download Weekly Investor`s Guide-20Jan2017

INVESTOR’S GUIDE
NICO Asset Managers A guide to the financial markets, investments and the economy
20 January 2017
“INVEST today for tomorrow “
Topic 220: Progressive, Regressive and Proportional Taxation
Introduction
Last week we continued the topic on how taxes affect your business and the
economy
by discussing the essential elements of a good tax system. This week
we will look at the classification of taxes: progressive, regressive and proportional
taxation.
We will also look at their advantages and disadvantages.
1. Progressive Tax
This is a tax that takes a larger percentage of income from high-income groups
than from low-income groups. This means that your proportion of tax liability
rises as your income goes up. Income taxes are progressive in Malawi because
tax rates increase as incomes increase.
Advantages:
 It helps to reduce income inequality by shifting the wealth of those who have
higher incomes to those with lower incomes.
 They
are equitable and fair since they are levied according to the ability of the
person to pay. Those who earn more give back more to government.
Disadvantages:
 Taxpayers
who suffer from higher tax burdens might try to find loop holes to
evade paying taxes.
 It is seen as a punishment for hard work. It discourages people from working
harder to earn more money.
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3. Regressive Tax
This is a tax that takes a larger percentage of income from lowincome groups than high-income groups. Sales tax in Malawi is seen
as regressive because it is a greater burden on low-income earners
than on the wealthy because the ability to pay is not taken into
consideration. It also makes some goods unaffordable for the poor.
Advantages:
 They are relatively easier to administer and collect.
 It gives a freedom of choice because only those who choose to use
a particular product or service must pay the tax.
Disadvantages:
 It can be viewed as unfair because it places a greater burden on
those at the lower end of the economic scale.
 It decreases much needed revenue used to supply necessary
public services.
5. Proportional Tax
This is a tax system that assesses the same tax rate to taxpayers
regardless of income or wealth. Tax rates do not change with levels of
income.
Advantages:
 It is simple, easy to understand and calculate.
Disadvantages:
 It does not satisfy the principle of equality and justice since the
burden falls heavily on poor people
 It brings less revenue to the government