Taxation especially direct tax can be classified according to the following systems. These are:
1) Progressive tax: Progressive tax is a form of tax in which the rate of tax increases as the income, stock of wealth or value of property to be taxed increases. This type of tax is graduated in such a way that its rate rises according to the level of income or wealth of the tax payer. People with higher income are taxed more heavily than those that receive low income. The tax burden increases with increasing income levels or as the amount of wealth possessed increases. A good example of a progressive tax is the Pay As You Earn (P.A.Y.E.) system. Progressive tax is demonstrated by a graph as shown in fig. 21.6.
2) Proportional tax: A proportional tax is a form of tax in which the rate of tax is the same irrespective of the level of income or wealth. In other words, it is a system of taxation in which the payers pay the same percentage or proportion of their income (or wealth) as tax. A good example of proportional tax is the company tax in which companies are required to pay a fixed percentage of their profits as tax. Proportional tax is demonstrated by a graph in fig. 21.7.
3) Regressive tax: Regressive tax is a tax system where the tax rate decreases as income increases. In this case, the higher the income of a consumer, the lower the rate of tax. In regressive tax, a poor person pays a higher proportion of his income than a rich person. A good example of regressive tax is poll tax. Regressive tax can be demonstrated by a graph shown in fig. 21.8.