Progressive taxation is a tax system used mostly in the US and the European countries. Progressive taxation levies taxes according to the individuals’ income. This means that an individual with high income will pay more in taxes than an individual with a low income.
Tax base of progressive taxation
The tax base of progressive taxation system is dependent on the following 2 factors –
- Income: The key concept of progressive taxation depends on the income of an individual. The tax rate increases for high income earners and decreases for low income earners.
- Expenditure: Progressive taxation can also be based on the expenditure through various sales taxes. The idea is, the more you spend, the more taxes you’ve to pay.
Progressive taxation is considered by many, as the best tax system as it helps the government to earn more taxes as well as protect the lower income individuals from the burden of high taxes. Let’s now check out the advantages of progressive taxation –
Advantages of progressive taxation:
- Proper distribution of money: Since progressive taxation allows income-based taxes, a person with low income will pay much less than a person with a high income. This is an effective way for proper distribution of wealth.
- Protects the lower income group: Progressive taxation system allows the lower income group to pay less in taxes. Since most of the working population falls in this category, progressive taxation is favored by most.
- Protection during recession times: Progressive taxation system also protects people during recession times because if their income drops, they fall into lower income bracket.
- Stable income stream: Progressive taxation also allows the government to have a stable income stream even in times of depression.
Let’s now check out some of the disadvantages of progressive taxation system. They are -
Disadvantages of progressive taxation:
- Opposes equality: Many believe that progressive taxation opposes the Constitution which promotes equal rights for citizens. By taxing the higher income group at a higher rate, progressive taxation defies the Constitution.
- Prevents taking high paying jobs: Progressive taxation system may also prevent individuals from taking a high paying job because most of their income would be taken away as taxes. It also discourages individuals to work harder to gain higher incomes.
- Encourages emigration: High progressive taxation system can encourage high earning workers to move overseas to escape the tax system.
- Encourages hiding of assets: High progressive taxation system can also encourage high income earners to opt for off-shore banking by which they can hide their assets and save taxes.
Although there are some controversies regarding the usefulness of progressive taxation system, it is still regarded as one of the most effective tax system in the world. The US government has adopted this tax system and has stuck to it since it is working for them and the government is earning revenue from it.