69. Progressive and Regressive Income Tax
Most people agree that high-income earners ought to pay higher taxes
than low-income earners. But how much more should they pay?
In a regressive tax system, the average tax rate applied to high-income
earners is lower than that applicable to low-income earners. For example,
one person earns 4 million and pays 2 million in taxes; another earns 20
million and pays 4 million. While the richer taxpayer pays more, his
average tax rate is only 20% versus the poorer taxpayer's 50%. An extreme
case of regressive tax is a lump sum tax, in which everyone would pay the
same amount.
A tax is proportional if a single rate is applied regardless of income level.
Assuming a 25% tax rate, the two taxpayers above would pay 1 million and
5 million, respectively. Before and after the tax, the income ratio between
the two remains unchanged.
Regressive and proportional taxes are considered unfair. Therefore,
personal income tax rates are often designed to be progressive, in which the
marginal tax rate increases with income to ensure that the rich bear a higher
average tax rate than the poor. In practice, a tax schedule often sets tax
brackets with corresponding income levels. In Vietnam, there are 5 tax rates
from 10% to 50% applied to different income levels above 3 million dong.
(Excluding an additional 30% rate on the part of the after-tax income
exceeding 15 million dong.)
An extremely progressive tax can equalize after-tax income. In the above
example, if the poorer taxpayer pays 1 million, the richer taxpayer must pay
17 million for each of them to retain 3 million after taxes. Such a system
would dissuade skilled people from staying productive.
