Merits and Demerits of Progressive Income Taxation

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The advantage of proportional taxation over progressive taxation is it is simple to compute and understand but simplicity is not necessarily a virtue in taxation. All over the world, governments now have switched over to the progressive form of taxation f

Merits and Demerits of progressive income taxation

Merits of progressive taxation

Cited below are the grounds on which progressive taxation is justified;

  1. It is reasonable- As under progressive taxation the rate of taxation rises as the taxable income rises hence people from higher income group are asked to bear the heavier load.
  2. Progressive taxation is fruitful- This form of taxation is beneficial for the government as the income yield is comparatively more than any other form of taxation.
  3. Progressive taxation is cost-effective- The cost incurred for collecting the taxes doesn’t rise along with the rate of tax.
  4. Brings about equality in income sacrifice- Under progressive taxation there is an equality of income sacrifice amongst all tax payers. This is owing to the fact that the law of diminishing utility is applicable with money as well. With every rise in earnings the marginal value of money decreases. Therefore, a rich individual doesn’t feel the pinch while paying a certain amount of tax. So by levying him more income tax he can be requested to make equivalent sacrifice.
  5. Reduction of income inequalities- This form of taxation helps to a certain extent in reducing inequalities in wealth distribution. Furthermore, equal circulation of income will result in raised well being of the society, as the richer individuals will forfeit only their comforts, whereas the poor individuals will be capable of satisfying their necessities to a better degree.  

All these advantages of Progressive taxation make it an important arsenal for the government for collecting revenues which decides the growth and development of the country.

Demerits of progressive taxation

Now let us move to the other side of the coin, the disadvantages of progressive taxation which are subject to the following controversies:

  1. If the rates of taxation are high, it will dispirit savings. Less capital will be collected, and the overall productive propensity of the society will be weakened.
  2. Progressive taxation is all subjective.
  3. It functions on the assumption that the amount of money has the same significance and utility to all taxpaying individual from the same income group. This is to a great extend untrue, as different taxpaying individuals go through different circumstances.  
  4. Progressive taxation is somewhat inconvenient and hurts the taxpaying individuals very much.

1 comment

Roberta Baxter
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Posted on Feb 9, 2012