Progressive tax systems
Tax is defined as an involuntary amount levied by the government on an individual, institution or a group of persons. Two types of tax regimes exist; direct taxes and indirect taxes. Direct tax, as the name suggest, is paid directly to the government by the respective taxpayer. In this case, the impact and incidence of the tax fully fall on the taxable person. On the other hand, indirect tax is collected on behalf of the authorities by an intermediary. Unlike the direct tax, the impact and incidence of the indirect tax can fall on different people; there is room to shift the tax burden (Miller, Vandome, & McBrewster, 2009).
The main canons of a good tax system are equity, economy, certainty and convenience. Based on these four principles, a tax system can be categorized into three based on how well they apply to these canons. It could be a regressive tax which taxes a larger proportion of low-income person's earnings than that of a high-income person. We can also have a proportional tax which levies the same percentage of tax to all individuals irrespective of their income. Finally, there is the progressive tax where an increasing proportion is charged on a person as their incomes rise. These three tax systems touch on the canons of taxations differently (Emilio & Martinez-Vazquez, 2011).
Progressive tax systems serve three social objectives. The first and goal of progressive taxation are to redistribute the tax burden from the low-income to the high-income persons. Secondly, progressive tax system serves as a means of redistributing incomes across the society. Third objective and of equal importance is that economic and political power of the wealthy must be kept in check through taxation (Chand, 2008).
The first goal of redistributing tax
The first goal of redistributing tax burden under the progressive tax system covers the four canons of a good tax regime. The principle of economy proposes that a tax regime should be cheap to collect and easy to administer. The essence of this is to minimize the cost of tax collection while maximizing on the tax yield. When a tax system is progressive, it becomes easier to administer since fewer people will attempt to evade taxes. Tax evasion is the unlawful failure by the taxpayer to pay taxes. Reduced tax evasion is driven by the notion that everyone will feel that the tax burden has been redistributed in proportion to their relative incomes (Diamond & Saez, 2011).
Canon of equity stipulates that any tax system should be just and fair to its taxpayers. In particular, taxes should be levied on individuals and institutions based on their ability to pay. Indeed this principle forms the core basis of a progressive tax system. Redistribution of tax burden under a progressive tax system is fair and just. Not only does it allow people to carry tax burden based on their ability to pay but it also leaves some net income enough for the tax-payers to have a decent living (Lieuallen, 2008).
Through the redistribution of the tax burden, a progressive tax system achieves the principle of certainty. A tax system is said to be certain if the authorities can adequately forecast the expected revenues to be generated from taxation. In a progressive tax system, certainty is brought about by the fact that fewer taxpayers will attempt to avoid taxes. Tax avoidance is the deliberate efforts by taxpayers to rearrange their finances in a manner that minimizes their tax liability (Fredriksen, 2012).
The middle and lower taxes brackets
By redistributing the tax burden, taxpayers at the middle and lower taxes brackets will have little incentives to avoid taxes since the load on then has already been made proportionally lighter. Most of those in the higher income bracket will find that the proportionate change in their tax burden relative to their income as a result of a unit increase in tax rate is marginal. In essence, their incomes are less responsive to little changes in tax rates. They will, therefore, have little impetus to avoid taxes when the tax burden is marginally redistributed to them. It follows that due to reduced instances of tax avoidances the authorities will be able to estimate the expected tax revenues with little uncertainties (Prasad & Deng, 2009).
The objective of redistributing the tax burden is also in line with the canon of convenience. Under this principle, the timing and the manner of taxation should not inconvenience the taxpayers. Progressive taxes achieve convenience by taking cognizance of the fact that income levels of individuals and institutions fluctuate with different times; lifetime income of an individual or institution is not constant across different periods. The progressive nature of this system of taxation ensures that when the taxpayer is in the high-income band they will be loaded with a larger tax burden and the reverse will occur when the same taxpayer is in a lower income band. The taxpayer is, therefore, able to pay the taxes conveniently while at the different income groups (Rothstein, 2008).
The second objective of progressive tax systems is to redistributing incomes across the society, and this equally satisfies the four major canons of taxation. Redistribution of incomes entails the transfer of wealth from one group of individuals or institutions to another through social expenditure programs, taxation or social transfer programs. Through progressive taxation, the revenues collected from the high-end income earners is used to fund programs that are geared towards improving the welfare of the lower income earners. When the low-income earners can directly feel the impact of the social programs initiated by the taxes collected, they get to appreciate the essence of paying the taxes (Lal, 2010).
Most of the social programs initiated are usually public programs and as such do not exclude those in the high-end tax band. Therefore, when the whole society can trace the social benefits that are attributable to the taxes collected, they are more cooperative with the authorities, and tax collection becomes easier. In this manner, progressive taxation enhances the canon of economy through redistributing incomes (Lal, 2010).
In the process of redistributing the incomes, the progressive tax systems extend the concept of equity. Because of the income disparities in various economies, those in the lower income bracket find it difficult to access essential services and goods. However, through the social expenditure programs funded by tax revenues, these groups of individuals can access these products and services. By taxing people based on their ability to pay the taxes, incomes are redistributed across social classes, and this ensures equitable access to primary resources (Fredriksen, 2012).
Redistributing of incomes provides the authorities with some assurance of certainty in future incomes. These social transfers and expenditure programs are supposed to improve the future incomes levels of the targeted groups. From the anticipated increased income levels, there is some level of assured increase in future taxable capacity of the tax-payers. In this manner, progressive income taxation ensures certainty in future incomes by redistributing incomes (Fredriksen, 2012).
Progressive taxes also redistribute the incomes across the society, and this ensures that the taxpayers pay what is convenient at a particular time. During the period under which a taxpayer is on social programs, they are not expected to pay much tax. However, as their incomes stabilize the taxpayer will be expected to pay more taxes, and in essence, much of their income will then be distributed to another lower income group (Lal, 2010).
The third objective of progressive taxation is to curtail the adverse effect of the economic and political powers of the rich individuals and institutions. Through taxing the high-income persons more, their ability to amass wealth is restricted. It is usually believed that when individuals control a substantial amount of economic resource, they hold the social, political and economic well-being of society at ransom. Equally, when an institution gets to be too big relative to its industry, it exerts monopoly power which could have detrimental effects to its competitors and the society as whole (Chand, 2008).
Over and above the canons mentioned above that progressive taxes propagate, this tax system is also considered to create a sense of efficiency and flexibility. It is seen as efficient in that it achieves its intended objectives with minimal side effects. The flexibility of this tax system comes from the fact that it fluctuates in line with the taxable capacity of individuals (Prasad & Deng, 2009).
Progressive taxation has faced its fair share of criticism. One of the cited shortcomings of the progressive tax is that it violated the notion that all people are equal by treating the poor favorably. Others have cited that it puts the burden of the society of a few individuals, a trend which in the long run is seen as rewarding indolence and punishing hard work. Further, there are those who argue that progressive taxes push the wealthy to look for tax loophole or in extreme cases move their investments out of the country (Miller, Vandome, & McBrewster, 2009).
From the above, it is evident that in the absence of progressive taxes, a nation's wealth could be concentrated on a few wealthy individuals. Equally, it can be noted that the wealthy individuals have more to lose than the less well-off when social structures such as property rights and community security are not maintained. Hence the reason as to why the wealthy should pay more taxes. Of the three tax systems mentioned, it is only progressive tax system that fully upholds the four canons of taxation. It is, therefore, correct to argue that a good tax system should be progressive (Whittenburg, Gill, & Altus-Buller, 2016).
Chand, S. N. (2008). Public Finance. New Delhi: Atlantic Publishers & Distributors.
Diamond, P., & Saez, E. (2011). The case for a progressive tax: From basic research to policy. Journal of Economic Perspectives, 165-190.
Emilio, A., & Martinez-Vazquez, J. (2011). The Elgar guide to tax systems. Cheltenham: Edward Elgar Publishing.
Fredriksen, K. (2012). Less income inequality and more growth t are they compatible? OECD Economics Department Working Paper, 929.
Lal, B. B. (2010). Income tax. New Delhi: Dorling Kindersley.
Lieuallen, G. G. (2008). Basic Federal Income Tax. Alphen aan den Rijn: Aspen Publishers Online.
Miller, F. P., Vandome, A. F., & McBrewster, J. (2009). Income Tax. Saarbrucken: VDM Publishing.
Prasad, M., & Deng, Y. (2009). Taxation and the worlds of welfare. Luxembourg Income Study Working Paper Series, 480.
Rothstein, J. (2008). The Unintended Consequences of Encouraging Work: Tax Incidence and the EITC. CEPS Working Paper, 165.
Whittenburg, G. E., Gill, S., & Altus-Buller, M. (2016). Interpretation of Tax Treaties under International Law. Boston: Cengage Learning.
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