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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. Head Office 19 Glyn Jones Road Lilongwe Branch Corner Kenyatta Drive Chibisa House NICO Centre P.O. Box 3173 P. O Box 30729 Blantyre Lilongwe 3 Tel No: 01 832 085/086 Fax: 01 821 617 Tel no: 01 757 086 Fax: 01 751 617 [email protected] | www.nicoassetmanagers.com INVESTMENT MANAGEMENT | CORPORATE FINANCE | INVESTOR SERVICES | INFRASTRUCTURE DEVELOPMENT NICO Asset Managers is a licensed Investment Manager and Investment Advisor by the Reserve Bank of Malawi 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