Merits and Demerits of Progressive Taxation

November 22, 2015 November 22, 2015

A progressive tax is imposed to raise the tax rate effectively more than the rate at which it was applied. It is characterised by a more than proportional rise in the tax burden relative to the increase in income. Thus, progressive taxes are seen as fighting inequalities in income distribution. The taxes that are often regarded as progressive include individual income taxes and estate taxes. Income taxes that are declared as progressive, may, however, become less for the upper-income demographic, especially, if a taxpayer is allowed to reduce his tax base by nominating deductions or by excluding some income aspects from his taxable income. For instance, income tax would be progressive if a worker earning Rs. 4,000 a year were to pay 5 per cent of income in tax but 30 per cent on an income of Rs. 50,000.

Indian income tax is a typical example of a progressive tax. In India, less tax is levied on people who earn less and high on people who earn more. On the other hand, such a method discourages individuals to earn more as there arises a feeling of a loss and hence, it results in low levels of growth and development because a feeling of unfairness develops. The poor seem to be rewarded while the rich are punished for working hard and earning more. This might lead to tax evasion also.

Merits of Progressive Taxes

The merits of progressive taxes are given below:

Principle of Equality

Since the rich gets less utility from additional units of money as compared to the poor, rich must be taxed more than the poor so as to develop equality. Hence, the biggest advantage of a progressive tax is that the wealthier individuals pay more of the tax burden.

Equal Distribution of Income

It is more just and impartial as it aims to achieve a reduction in the inequality in earnings of the citizens in an economy.

Economical

It is inexpensive to collect progressive taxes, as the cost of collection of taxes does not increase in the same proportion as the rate of tax increases which make the progressive tax economical.

Elastic

The revenue collection of a government can be augmented by increasing the tax rate. Its rate can be altered as per the changing needs of the country, thereby displaying its elasticity.

Opportunities of Employment

The marginal propensity to consume increases as the wealth shifts from the rich to the poor by imposing progressive taxation. Hence, it leads to more investment and creates opportunities of employment.

More Just

These taxes are more just as the burden is shifted from the rich to the poor, thereby, serving the purpose of morality in taxation.

Recession

Progressive taxation helps protect people during a recession because if their income drops, they fall into a lower tax bracket. This means they will owe less money to the government.