So, what’s your point of view? Read on as you try to figure it out! Now, isn’t it unfair that even a person earning less has to pay tax? This is what sparked up the flat tax vs progressive tax debate. So, we can see that in the second scenario, B ends up paying tax unlike earlier, while C ends up paying less tax. However, if the same people had to pay taxes under a flat tax policy of, say,10%, A, B and C had to pay $600, $200 and $2000 respectively. So, how much do these people end up paying every month? Yes, you’re right! A pays $600, B enjoys total exemption from tax payment and C has to pay $2400.

Now say, the place where these people live, has a progressive taxation policy, which states that income below $5000 is exempted from tax, income between $5000 to $10,000 will be taxed at 10% and income above $10,000 will be taxed at 12%. Consider that A is earning $6000 per month, B is managing $2000 while the monthly income of C is $20,000. Say, there are three individuals, A, B and C. In order that you have a clearer understanding of the points discussed hereafter, let us take a look at a small example. Here we have illustrated the major differences between progressive tax and flat tax. How is Progressive Tax Different from Flat Tax However, the progressive tax vs flat tax debate has continued ever since the two methods of taxation came into existence. Both these methods of taxation come with their own pros and cons.

So, in countries like Bulgaria, Romania and Russia that follow a flat tax system, the government decides on a particular rate of interest for tax deduction that is applicable for all, and does not allow for any exemptions. When it comes to flat tax, however, the underlying principle is that everyone should be treated equally and there should be no discrimination, whatsoever, when it comes to payment of taxes. Thus, in economies that have progressive tax, it is the wealthier people of the society who are made to pay bigger amounts as tax, while the low-income group is practically exempted from the payment of taxes. Progressive tax is based on the principle that higher the income of the individual or bigger the business, the higher is the ability to pay tax. On the other hand, the tax for which the rate of taxation is universal and does not increase with increase in base amount, is flat tax.

The tax for which the rate of taxation increases with increase in the base amount, is termed as progressive tax.

Progressive regressive and flat taxes