Progressive Tax System: Progressive tax is a tax which increases or decreases with the increase or decrease in the income of the person. The rate of tax is gradually higher for higher slabs of income. Under this system, a basic exemption limit is fixed below which no person would be taxed.
Progressive Tax System is not the ultimate taxation solution system nor it is free from criticism. There are some merits and demerits of this progressive tax system, which are described below-
Merits of Progressive Tax System :
(1) Based on ‘Ability to Pay’: ‘Income’ and ‘ability to pay’ are positively correlated. Capacity to pay tax increases with the increase in income hence rate of tax increases with the increase in income. It bears the least opposition from the side of tax payers.
(2) Morally Just: According to, the diminishing marginal utility, the marginal utility of sacrifice is taken into account while calculating the tax liability of different persons. According to the fundamental principle of public finance, the broadcast shoulders should bear the heaviest burden hence richer section must bear heavier burden of taxation than the poorer section. In this sense, it is morally Just.
(3) It promotes equality in wealth Distribution. More income, more taxes is the principle of this tax system. In this way, it pro motes equal distributions of wealth and income because richer are required to pay the tax at higher rates. Taking this factor into account, the government levies taxes at higher rates from richer section of the society.
(4) More Flexible. The government can bring about a sizable increase through the slightest modification in rates. Rates of taxes at higher brackets of income can increase the tax revenue. Government may provide relief in taxes to the poor section of the society. During crisis, more taxes can be collected by adjusting the tax rates suitably.
(5) Less Expensive. The Progressive Tax System is economical also. It is economical in the sense that with minor changes in the rates, substantial changes can be brought about in tax collection without incurring any extra cost. Moreover, the government may concentrate its attention more on richer section of the society and bring about an increase in income without involving any additional cost.
Demerits of Progressive Tax System :
Following are the chief defects of the Progressive Tax System –
(1) Arbitrary Fixation of Rates. The rates of tax are fixed arbitrarily specially at higher levels of income. They are fixed in an indiscriminate manner when government needs more funds at a time of crisis.
(2) Savings Discouraged. It adversely affects the propensity to save because the burden of taxation falls more on those sections of society which are in a position to save because they have surplus. It dims the chances of more investments in productive sectors.
(3) Tax evasion. There are much chances of evading tax. The tax-payer tries to evade the tax by presenting the false statement of his income or wealth before the tax authorities. It injects a feeling of tax evasion in the minds of those who arc liable to pay tax at higher rates.
(4) Discourage productive activities. Progressive tax system discourages the productive activities in the country because the producer is not interesting to earn more They also find it difficult to get funds at cheaper rates because the rate of savings go down.
In spite of its drawbacks and criticisms, the progressive tax system is widely acclaimed and supported because it helps in reducing inequalities in the society.