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If the tax rate increases with the higher level of income, it shall be called            
  • a)
    Proportional tax     
  • b)
    Progressive tax    
  • c)
    Lump sum tax     
  • d)
    Regressive tax
Correct answer is option 'B'. Can you explain this answer?
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Most Upvoted Answer
If the tax rate increases with the higher level of income, it shall be...
Progressive Tax:
A progressive tax is a type of tax system in which the tax rate increases as the income level of an individual or entity increases. This means that individuals with higher incomes are required to pay a higher percentage of their income in taxes compared to those with lower incomes.

Explanation:
A progressive tax system is designed to promote fairness and equity in taxation. It is based on the principle of ability to pay, where those who earn more are expected to contribute more towards public services and government programs. This helps to redistribute wealth and reduce income inequality.

Benefits of Progressive Tax:
1. Fairness: Progressive taxes help to ensure that those who can afford to pay more do so, while those with lower incomes are burdened with a smaller tax liability.
2. Wealth Redistribution: By taxing higher income earners at a higher rate, progressive tax systems help to redistribute wealth from the rich to the poor, narrowing the wealth gap in society.
3. Social Welfare: The additional tax revenue generated from higher income individuals can be used to fund social welfare programs, such as healthcare, education, and infrastructure development, benefiting the entire society.

Example:
For example, let's consider a progressive tax system with three tax brackets:
- Income up to $50,000: Tax rate of 10%
- Income from $50,001 to $100,000: Tax rate of 20%
- Income above $100,000: Tax rate of 30%

In this scenario, an individual earning $60,000 would pay 10% on the first $50,000 ($5,000) and 20% on the remaining $10,000 ($2,000), resulting in a total tax liability of $7,000.

On the other hand, an individual earning $120,000 would pay 10% on the first $50,000 ($5,000), 20% on the next $50,000 ($10,000), and 30% on the remaining $20,000 ($6,000), resulting in a total tax liability of $21,000.

As the income level increases, the tax rate also increases, reflecting the progressive nature of the tax system.

Conclusion:
A progressive tax system is characterized by higher tax rates for higher income levels. It aims to achieve equity and fairness in taxation by ensuring that those with higher incomes contribute more towards the overall tax revenue, thereby promoting wealth redistribution and social welfare.
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Similar UPSC Doubts

In a poor country like India, as income rises people first concentrate on increasing their consumption of what they regard as basic or more essential consumer goods. For the poor, these goods would primarily include cereals and for people at successive levels of higher income protective foods, simple non-food consumer goods, more modern, better quality non-food consumer goods and simple consumer durables, better quality consumer goods, and so on. When the demand for basic and more essential consumer goods is more or less met, demand for the next higher level of consumer goods begins to impinge on consumer decision making and their consumption increases. There is thus a hierarchy of income levels and a hierarchy of consumer goods. As incomes rise and one approaches the turning point referred to, there is an upward movement along the hierarchy in the demand for consumer goods which exhibits itself in a relative increase in the demand for these goods. If one examines the past consumption behaviour of households in India, one finds confirmation of the proposition just made. Until the mid seventies one notices a rise in the proportion of consumption expenditure on cereals, and thereafter, a steady decline reflecting a progressive increase in the relative expenditure on non-cereal or protective foods. About the same time the rising trend in the share of food in total consumption expenditure also begins to decline, raising the proportion of expenditure on non-food consumer goods. Simultaneously one also notices a sharper rise in the proportion of expenditure on consumer durables. Thus, what one sees is an upward movement in consumer demand along the hierarchy of consumer goods which amounts to a major change in consumer behaviour.Whenever there is a decline in the proportion of consumption expenditure on cereals

In a poor country like India, as income rises people first concentrate on increasing their consumption of what they regard as basic or more essential consumer goods. For the poor, these goods would primarily include cereals and for people at successive levels of higher income protective foods, simple non-food consumer goods, more modern, better quality non-food consumer goods and simple consumer durables, better quality consumer goods, and so on. When the demand for basic and more essential consumer goods is more or less met, demand for the next higher level of consumer goods begins to impinge on consumer decision making and their consumption increases. There is thus a hierarchy of income levels and a hierarchy of consumer goods. As incomes rise and one approaches the turning point referred to, there is an upward movement along the hierarchy in the demand for consumer goods which exhibits itself in a relative increase in the demand for these goods. If one examines the past consumption behaviour of households in India, one finds confirmation of the proposition just made. Until the mid seventies one notices a rise in the proportion of consumption expenditure on cereals, and thereafter, a steady decline reflecting a progressive increase in the relative expenditure on non-cereal or protective foods. About the same time the rising trend in the share of food in total consumption expenditure also begins to decline, raising the proportion of expenditure on non-food consumer goods. Simultaneously one also notices a sharper rise in the proportion of expenditure on consumer durables. Thus, what one sees is an upward movement in consumer demand along the hierarchy of consumer goods which amounts to a major change in consumer behaviour.Prices of protective food have risen because

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If the tax rate increases with the higher level of income, it shall be called a)Proportional tax b)Progressive tax c)Lump sum tax d)Regressive taxCorrect answer is option 'B'. Can you explain this answer?
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