Progressive tax: A tax system where the rate of taxation as income increases is called progressive tax system. The principle of a progressive tax is higher the income, higher the rate of tax.
Merits of Progressive Taxes: These are the merits of progressive tax system.
1. Equality of Sacrifice: The progressive tax system leads to equality of sacrifice. Because the marginal utility of income decreases with an increase in income. Therefore a man with higher income is taxed at a higher tax rate.
2. Equal distribution of Income: It is more equitable. The richer has to pay more as compared to the poorer. So, this principle of taxation helps in reducing the inequality in income of the people in an economy.
3. Economical: The cost of collection of progressive taxes is small. The money spent on collection of taxes does not increase in the same ratio as the rate of tax increases. So, it is economical.
4. Elastic: The tax rate can be revised to increase revenue of the government. Its rate is changeable according to the needs of country. So, it has a higher degree of elasticity.
5. Opportunities of employment: By apply of this method of taxation, the wealth transfers from the rich to poor. The marginal propensity to consume of the people increases which leads to encouragement of investment and this process provides the opportunities of employment.
Demerits of Progressive Tax:
1. Evasion: These taxes are fixed on valuation and it is a tax on honesty.
2. Loss of Revenue: Due to tax evasion point of view, people conceive their income and shows false statement in the tax return form.
Merits of Progressive Taxes: These are the merits of progressive tax system.
1. Equality of Sacrifice: The progressive tax system leads to equality of sacrifice. Because the marginal utility of income decreases with an increase in income. Therefore a man with higher income is taxed at a higher tax rate.
2. Equal distribution of Income: It is more equitable. The richer has to pay more as compared to the poorer. So, this principle of taxation helps in reducing the inequality in income of the people in an economy.
3. Economical: The cost of collection of progressive taxes is small. The money spent on collection of taxes does not increase in the same ratio as the rate of tax increases. So, it is economical.
4. Elastic: The tax rate can be revised to increase revenue of the government. Its rate is changeable according to the needs of country. So, it has a higher degree of elasticity.
5. Opportunities of employment: By apply of this method of taxation, the wealth transfers from the rich to poor. The marginal propensity to consume of the people increases which leads to encouragement of investment and this process provides the opportunities of employment.
Demerits of Progressive Tax:
1. Evasion: These taxes are fixed on valuation and it is a tax on honesty.
2. Loss of Revenue: Due to tax evasion point of view, people conceive their income and shows false statement in the tax return form.