Taxes raise revenue and change behaviour; they can be progressive, regressive or proportional, and direct or indirect.
Governments tax for six main reasons. Taxes raise revenue for public spending. They discourage demerit goods such as cigarettes. Tariffs reduce imports. Taxes can move income from rich to poor. They change total demand in the economy. And taxes such as a carbon tax encourage firms to pollute less.
A progressive tax takes a larger percentage of income from people with higher incomes. A regressive tax takes a larger percentage from people with lower incomes. A proportional tax takes the same percentage from everyone.
A direct tax is paid straight to the government by the person who earns the income, such as income tax. An indirect tax is a tax on spending, collected by sellers, such as GST.
Taxes affect everyone. Higher taxes reduce what consumers and workers can spend and may reduce the reward for working. Firms face higher costs or lower demand. The government gains revenue. The economy may grow more slowly if taxes discourage work and investment.
- Progressive
- Takes a larger % of higher incomes.
- Regressive
- Takes a larger % of lower incomes.
- Proportional
- Same % of every income.
- Direct vs indirect
- Tax on income (e.g. income tax) vs tax on spending (e.g. GST).
Worked example: Singapore's taxes as examples
Singapore uses both direct and indirect taxes.
- Income tax is direct and progressive: rates rise with income, up to 24% on the highest incomes.
- Goods and services tax (GST) is indirect and was raised to 9% in 2024.
- GST is regressive in effect: low-income households spend more of their income, so it takes a bigger share of it. Payments to lower-income households help offset this.
- The carbon tax charged on large emitters aims to encourage sustainability.
Watch out for this
A regressive tax is one where poorer people pay more dollars than richer people.
Regressive is about the percentage of income, not the dollar amount. A rich person may pay more dollars of GST, but it is a smaller share of their income.
Check your understanding
Which is an example of a direct, progressive tax?
- An income tax whose rate rises as income rises
- A 9% tax on all goods and services
- A fixed $100 tax paid by every adult