Progressive Tax Definition
Progressive tax refers to the increase in the average rate of tax with the increase in the amount of taxable income so that the liability of paying heavy taxes passes to those who earn a higher income and those with lower income can have a relaxation from the heavy income tax obligations.
Progressive Tax System aides in reducing the income inequalityIncome InequalityIncome Inequality is defined as an unequal distribution of income between the masses or a situation when a large proportion of total income is held by the small percentage of the population. It happens due to variation in sources of income, number of dependents, easier availability of resources, etc.read more in an economy by imposing a higher rate of tax on the higher income group and allowing lower-income groups to pay a lower rate of tax. Such tax is called progressive since the liability of a taxpayer increases/decreases with his/her proportion of income.
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Progressive Tax Example
India has its tax brackets (slabs) that segregate income groups into the accordance of their income upon which the government levies respective tax rates for the same. The tables for the same are given below for reference for the financial year of 2018-2019:
For individuals who are less than 60 years of age
| Annual Income | Tax Rates | Health and Education |
|---|---|---|
| Upto Rs. 2.5 Lakhs | Nil | Nil |
| Rs. 2,50,001- Rs. 5 Lakhs | 5% | 4% of Income Tax |
| Rs. 5,00,001- Rs. 10 Lakhs | 20% | 4% of Income Tax |
| Above Rs. 10 Lakhs | 30% | 4% of Income Tax |
For senior citizens who are 60 years of age or higher, but less than 80 years
| Annual Income | Tax Rates | Health and Education |
|---|---|---|
| Upto Rs. 3 Lakhs | Nil | Nil |
| Rs. 3,50,001- Rs. 5 Lakhs | 5% | 4% of Income Tax |
| Rs. 5,00,001- Rs. 10 Lakhs | 20% | 4% of Income Tax |
| Above Rs. 10 Lakhs | 30% | 4% of Income Tax |
For senior citizens who are more than 80 years
| Annual Income | Tax Rates | Health and Education |
|---|---|---|
| Upto Rs. 5 Lakhs | Nil | Nil |
| Rs. 5,00,001- Rs. 10 Lakhs | 20% | 4% of Income Tax |
| Above Rs. 10 Lakhs | 30% | 4% of Income Tax |
It can be inferred that India follows a partial progressive tax system since we can observe that every year the government produces a ‘Budget’ according to which the tax slabs and tax rates are levied. However, it has been observed that there is no balance between India’s direct and indirect taxes – the base for the direct tax is too small in comparison to indirect taxes that are too large in accordance. As a consequence, the tax revenue incurred by the government is too low. As per official reports, only 1.6% of the population in India pays taxes.
Many economists believe that GST is more regressive because the poor sect of people ends up paying a greater proportion of their income on consumption. For example, in the current GST taxation, biscuits are levied at 18%, whereas gold is charged at 3%. It indicates that consumption of very economic things that should be easily available at a much cheaper rate is an expensive purchase for the lesser-income group of people. India needs to be more progressive in order to maintain a sound balance of income distribution and uniform economic growth for a better future.
Pros
- It helps to fight recession – If the entire economy earns less, then they will have to pay less to the government.
- They are logical since it focuses on the earning capacity of an individual who is not burdened with paying a higher amount of tax that can be disproportionate to his/her income. They help in assuring the sense of ability and equality throughout the economy.
- It helps in raising employment opportunities since the marginal propensity to consumptionMarginal Propensity To ConsumptionMarginal Propensity to Consume refers to the increase in consumption owing to the increment in disposable income. It is determined as the ratio of change in consumption (ΔC) to change in disposable income (ΔI). read more increases as wealth gets distributed from the rich to the poor. Therefore, it leads to a greater number of employment opportunities.
- It displays elasticity in the economy since the tax rate can be altered according to the rise and fall of the income overall and hence changing in synchrony to the needs of the country.
- It is very much inexpensive—progressive taxes are very much economical because the cost of collection of taxes remains unaffected with respect to the same proportion as the rate of tax increases, which makes such imposition rather economical.
- The imposition of progressive taxes in an economy helps in achieving an equal distribution of income throughout the economy. It helps in bridging the gap between the unequal distribution of income between the rich and poor.
Cons
- There is a vast scope of tax evasion if progressive taxes are implied in an economy. It becomes a gateway for the rich income group to hide their wealth and represent only a nominal amount as their income that automatically enables them to fall into a lower tax bracket.
- It leads to dishonesty and false statements in tax return forms, which ultimately leads to loss of revenue of the government through unfair means.
- The imposition of such a tax creates an adverse effect on the growth of industry and commerce. It is based on the inaccurate assumption of diminishing marginal utilityMarginal UtilityA customer's marginal utility is the satisfaction or benefit derived from one additional unit of product consumed. It could be calculated by dividing the additional utility by the amount of additional units.read more of money. The marginal utility being a subjective occurrence as it is wrong to assume that money utility declines with the increase in income.
- It is extremely capricious and uncertain; there is no standardized rule or principle to which such tax rates are fixed. There is no thumb rule of guidance to which rates of brackets must be adopted. Different nations imply different tax rates as economic income distribution varies from one to another.
- Some of the opinions hold that progressive taxes are unjust as the income class that incurs a higher income through their honest means must pay a higher rate of tax.
- As the taxes received from the richer class are redistributed from the poor class through various government programs, some may perceive this as socialism.
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