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Progressive Taxation

Progressive tax is a form of type which increases as the taxable income increases. In many cases, the term is usually used to refer to personal income taxes where the more one earns in disposable income, the higher the percentage of income tax will be incurred. Progressive tax is also used to refer to various adjustments of tax base which may come in form of tax exemptions, tax credits or other forms of selective taxations that will have or create a progressive distributional effect. This can be clearly shown by the sales tax that is placed on luxury goods. Alternatively, the exemption of tax from basic necessities can also have a progressive effect. In both cases, an increase or a decrease in tax burdens on high-end and low-end consumer products respectively, will have a progressive adjustable effect.

Thus, the principle of progressive taxation is meant to boost the income of poor and middle-class families since this will result in greater consumption and in turn have a stimulative effect on the economy that is much greater than boosting the incomes of the rich. As a result, both in the United States and Europe, a large number of economists favor progressive taxation. The alternative to progressive taxation is regressive taxation. Here, the tax rate decreases as the taxable amount increases. This means that regressive tax is more burdensome to the poor, based on resources, and favors the rich. A good example of regressive taxation is property tax. In the United States, very high income earners also tend to be taxed regressively, equating income tax across wage and rental incomes.

A good tax system should be efficient in raising enough revenue that will adequately sponsor government projects without burdening the tax-payer and at the same time without resulting in disincentivising ongoing investment. It should also be simple and understandable from a layperson point of view. This is because if it becomes incomprehensible to the average tax-payer, it is likely to appear unjust. This in turn will result in more costs and discontentment from the tax-payer. A good tax system should also be equitable. This means that the taxation should be governed by one’s ability to pay. Thus, the more a person or a firm has, the more the tax they should be expected to pay while the lower the income, the less the tax. A good tax system should also be guided by the benefit principle. This means that those who use a service that has been publicly provided should pay for it.

Progressive taxation can be achieved by use of direct taxation, indirect taxation or both. In direct taxation, the tax is collected from the income of the tax-payer even before he or she collects his or her wages. In indirect taxation, the tax is charged on goods and services sold. Thus, this form of tax is often avoidable. It is also not demanded from everybody. There are many merits and demerits to both of these forms of taxation. Direct taxation for example reduces the incentive to work while indirect taxation may result in people with slightly different circumstances but with similar incomes paying different amounts. For example, one who travels for 50 miles to work everyday pays more tax than one who walks despite the fact that both may be earning the same amount of income and using the same public service.

There are many arguments against the implementation of progressive taxation, some of which includes its supposed violation of the principle of equality, a belief that it shifts the economic production from capital investments and that it increases tax loopholes like income splitting techniques. However, the principle of progressive taxation continues to be a large part of governance in many states.

Tags: credit, government, Income, revenue, tax, Taxation

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