4.5.2 - Taxation

• Progressive taxes are characterized by higher tax rates as income increases. In other words, individuals with higher incomes pay a higher percentage of their income in taxes
• Proportional taxes apply a constant tax rate to all income levels. This means that individuals pay the same percentage of their income in taxes, regardless of their income.
• Regressive taxes impose a higher tax burden on lower-income individuals compared to higher-income individuals. This occurs because the tax rate decreases as income increases.
• Tax is used to pay for the number of goods and services that the government provides
• Changes in tax rates can influence people's incentives to work. High tax rates on income may reduce the incentive to work more or to engage in productive activities, especially at higher income levels. This can impact the supply side policy
• The Laffer Curve illustrates the relationship between tax rates and tax revenues. Initially, as tax rates rise, tax revenues increase. However, at some point, higher tax rates can discourage economic activity, leading to a decrease in tax revenues.

  
• Taxation can be used as a tool to redistribute income. Progressive tax systems can help reduce income inequality by imposing higher tax rates on high-income individuals.