Progressive Taxation: Social and Economic Arguments

Study Notes

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.

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.

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 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.

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).