Progressive Taxation: Social and Economic Arguments

Progressive Taxation

• Progressive taxation is a system where the rich pay higher tax rates than the poor, based on the principle of justice.
• Social argument: the rich have a responsibility towards the poor in society, hence they should pay more taxes.
• Reduces economic inequality, as the tax system helps to bridge the gap between the rich and the poor.
• Has an in-built mechanism to deal with inflation, as tax rates rise automatically when income increases, reducing inflationary pressure.

Criticisms of Progressive Taxation

• Diminishing marginal utility of income makes it difficult to decide the tax rate.
• Heavy progression rates can affect the capacity and willingness to save, particularly among the rich.
• May discourage hard work and earning more income, as people may choose leisure over work.

Regressive Taxation

• A system where the ratio of tax liability to tax base decreases as the tax base increases.
• Incentivizes work and earning more income, encouraging savings.
• Highly iniquitous, as the poor pay a larger proportion of their income in taxes than the rich.

Direct and Indirect Taxes

• Direct taxes: demanded from the person intended to pay it, e.g. personal income tax or tax on a house occupied by the owner.
• Indirect taxes: demanded from one person in the expectation that they will indemnify themselves at the expense of another, e.g. sales tax or customs duty.

Classification of Taxes

• Traditional classification: based on whether the burden is actually paid by the person intended to pay it.
• Modern classification: based on assessment, e.g. taxes on income received (direct) or expenditure incurred (indirect).

Comparison of Direct and Indirect Taxes

• Allocative aspect: affecting resource allocation.
• Administrative point of view: ease of collection and administration.
• Distributional effects: impacting income distribution and social welfare.