Defending Dignity A Manual for National Human Rights Institutions on Monitoring Economic, Social and Cultural Rights To illustrate the human rights implications of how tax revenue is composed, consider two main types of tax: direct taxes (on income) and indirect taxes (on goods and services). 11.4.1. Direct taxes Direct taxes (e.g. personal and corporate income taxes) are the main tool for redistributing income and for fighting post-tax income inequality. But this depends whether they are: • Regressive: Poorer people pay proportionally more of their income in tax than do wealthier people (even if on paper everyone pays the same amount of tax). • Proportional or flat: Poorer people and wealthier people pay the same proportion of their income in tax. However, flat taxes can be de facto regressive in many cases, depending on how they are implemented (and especially the deductions and exemptions put in place). • Progressive: Wealthier people pay proportionally more of their income in tax than do poorer people. The table below compares two tax payers, one with an annual income of $20,000 and one with an annual income of $200,000. Who contributes most to the public finances under each type of tax? Who benefits? Comparing regressive, proportional and progressive taxes Total income Taxpayer 1 ($20,000) Taxpayer 2 ($200,000) Tax type Total taxes Regressive Amount of tax Tax as share of total income $2,200 11.1% $2,200 1.1% $4,400 Proportional Amount of tax Tax as share of total income $400 2.0% $4,000 2.0% $4,400 Progressive Amount of tax Tax as share of total income $200 0.1% $4,380 2.2% $4,400 Other challenges related to income tax include income tax avoidance (the arrangement of one’s financial affairs to legally minimize tax liability) and tax evasion (the illegal non-payment or underpayment of tax), especially among the wealthy and corporate sectors. Estimates by the Tax Justice Network, based on World Bank data, indicate that US$3.1 trillion is lost annually to tax evasion globally. For this reason, it is important to evaluate who is paying what in practice, as well as looking at what the income tax rate is on paper (the statutory rate). 11.4.2. Indirect taxes Indirect taxes are levied on consumption; for example, as a percentage of the sale price of a good or service. Taxes on consumption, such as a value added tax (VAT), Goods and Services Tax (GST) or sales tax, are broad-based and expected to have a higher tax yield. They are also relatively easy to administer so are often relied heavily upon to generate revenue. 114