Know about the Principle of Progressive Taxation and its Merits and Demerits

When the rate of tax increases with the rise in income, It is called the progressive taxation. For example the yearly income of a person is Rs. 20,0000 and he asked to pay 15% of his income to the government. Suppose further that his yearly income rises from Rs. 20,0000 to 40,0000. If government asks him to pay 40% of his income in the form of tax that is under a progressive system, the amount of a tax to the government increases more than proportionately to the income.

ADVANTAGES

1. Equality of Sacrifice :-
A progressive taxation leads to equality if sacrifice, as the income of a person increases, his marginal utility of income decreases. So it would not be unfair if a man with higher income is taxed at higher rate.

2. Increase in Revenue :-
It is also justified on the ground that it yield more revenue to the state.

3. Equality of Income :-
The progressive taxation is very helpful in reducing the inequality in income by higher taxation on rich people.

4. Economical :-
The collection of tax is less expensive. It is economical because when the rate of tax increase with the rise in income, the money spent on administration does not increases in the same ratio.

5. Elasticity :-
The elasticity is also found in the system. The state can easily increase its revenue by raising the rate of tax.

6. Achievement of Full Employment :-
Keynes says that if we want to achieve full employment in the country, then we will have to introduce the progressive taxation. By introducing this system we can increase the effective demand which is very useful in increasing the rate of employment.

DISADVANTAGES

The main objections on this system are following :

1. Rate of Diminishing Utility :-
It is very difficult to know that how the utility diminishes with the rise in income, so that tax may be increased according to the rise in income.

2. Wrong Assumption :-
It has been assumed that if the income of two persons is the same then utility will also be same for the two persons. But in fact it is not true.

3. Expenditure on Luxury Goods :-
It has been also assumed that as the income of any person increases, the expenditure on luxury goods also increases.

4. People Conceal their Income :-
When people come to know that with the rise in their incomes, the tax rate will increases, then they may try to conceal their incomes by showing false statement.

5. Saving Discouraged :-
It is also objected that this system discourages the rate of savings. When rate of savings will fall, it will lead to reduction in investment and employment.

6. Only a Person Valuation :-
The rate of taxes are fixed on purely personal valuation, therefore, they may not lead to equal sacrifice. Any how we can say that if the people are taxed at very steep rates, it will discourage saving and investment. So if the degree of progression does not exceed the limits of reason then progressive taxation is justified.