Edexcel A Level Economics A:复习笔记4.5.2 Taxation

Progressive, Proportional & Regressive Taxes

  • Tax systems can be classified as progressive, proportional or regressive
  • Most countries have a mix of progressive (direct taxation) & regressive (indirect taxation) taxes in place


  1. Progressive tax system: as income rises, a larger percentage of income is paid in tax (e.g. UK Income Tax; UK Corporation Tax). This system is built around the idea of marginal tax rates

    UK Progressive Tax Rates - June 2022

    Tax Band Taxable Income Tax Rate

    Personal Allowance


    Up to £12,500




    Basic Rate


    £12,501 to £50,000




    Higher Rate


    £50,001 to £150,000




    Additional Rate


    Over £150,000



    Using this system, a salary of £60,000 would attract a tax bill of £11,499.80, calculated as follows:
    First £12,500 - no tax
    Next £37, 499 at 20% = £7499.80
    Final £10,001 at 40% = £4,000

  2. Regressive tax system: as income rises, a smaller percentage of income is paid in tax (e.g. excise duties on alcohol & petrol in the UK; VAT; Air passenger duty). Regressive taxes can have a big impact on low-income households. In 2020 they represented 30% of income for the poorest 20% of households - but only 10% of income for the top 20% of households
  3. Proportional tax system: the percentage of income paid in tax is constant, no matter what the level of income e.g 10% tax is paid irrespective of whether income is £10,000 or £100,000. Bolivia uses this system & the tax rate is 13%

The Economic Effects of Changes in Tax Rates

  • Changes in direct & indirect tax rates influence a range of economic variables
    • The greater the size of the change, the greater the ripple effects through the economy


Effects Of Tax Rate Changes

Impact Explanation

Incentive to work


  • The higher the tax rate, the lower the incentive for the unemployed to seek work - or for existing workers to work overtime
  • In 2022, the Adam Smith Institute calculated that average earners in the UK work from the 1st January to the 8th June (Freedom Day) to pay their taxes - all income after that point belongs to them

Tax revenues


  • The Laffer curve illustrates the relationship between increasing tax rates & the level of government revenues received
  • The broad idea is that as tax rates increase, a point will be reached where disincentivized workers work less resulting in less income & less government tax revenue. More people will actively seek to avoid paying tax (tax avoidance) or try to move their income elsewhere


The Laffer Curve demonstrates the relationship between tax revenue & tax rates


  • Tax rate increases up to point A, will result in an increase of tax revenue.  Further tax rate increases from A to B result in a loss of tax revenue from C to D

Income distribution


  • A progressive tax system redistributes from those with higher income to those with lower income & reduces income inequality
  • Sometimes the benefits of a good progressive tax system are eradicated by the penalties imposed through multiple regressive (indirect) taxes

Real output & employment


  • If the tax rate increases, more money is withdrawn from the circular flow of income (leakage)
  • This will likely cause a reduction of aggregate demand (AD) as firms & households have less disposable income
  • As AD slows down, fewer workers may be required for production & unemployment may increase

Average price level


  • An increase in indirect taxes reduces disposable income & so workers may petition their employer for a salary increase
  • If they receive the increase the economy may face a wage-price spiral
  • Indirect taxes also increase costs of production for firms possibly leading to cost-push inflation

The trade balance (X-M)


  • An increase in taxes can reduce disposable income which is likely to reduce the level of imports
  • This may improve the trade balance (exports - imports)

Flows of Foreign Direct Investment (FDI)


  • If the rate of corporation tax increases relative to other countries, it may result in less inward foreign direct investment