A progressive taxation system basically refers to a process under which the rate of taxes is seen to increase along with an increase in income. This kind of system is often seen to grant access to various adjustments for taxable income.
They include exemptions, deducted amounts as well as the credit of taxation. Such aspects can be applied to the provision of an additional amount of relief to the various low-income earners of society. They can also be used for encouraging business investment to a great extent.
| Benefits | Drawbacks |
| Gets rid of economic burden | Reduction of taxable income |
| Grants access for everyone to invest | More expensive to implement |
| Production of better total income | Encourages inequity |
| Improvement of the spending power | Affects at the bracket cutoff levels |
| Requirement of ongoing payments | Affects low-income earners |
Advantages of Progressive Taxes:
• Gets rid of economic burden:
The progressive system of taxation is known for positioning most of its economic burden only to where it belongs. Instead of creating an impact upon the whole country, progressive taxes therefore benefit the poorer sections of the society.
This is done so because a majority of the poor householder’s disposable source of income is taken away. This therefore, throws light upon the fact that a lesser amount of money being available for daily necessities as compared to the richer households.
• Grants access for everyone to invest:
The system of progressive taxes is such that it allows all the householders to make a contribution for the welfare of the country. Irrespective of the kind of contributions that are made, the taxation process definitely helps in creating a personalized kind of investment.
Along with such benefits, the actual amount of revenues is also significantly generated with the help of the charged taxes on the upper brackets. This therefore helps in creating a sense of equality in the society.
• Production of better total income:
With the help of progressive taxes, the government body can definitely earn a good amount of income. This takes place due to the fact that the taxation burden is targeted entirely towards the wealthier sections of the society.
Therefore, the ones with a wealthier household have to pay a higher percentage, but there can be a few budget oriented deficiencies which might occur.
• Improvement of the spending power:
The lower-income earners are seen struggling for gaining the income value in order to make a strong statement within the range of the community. Under the progressive taxation system, one can definitely benefit because it helps in stimulating the economy to a great extent.
This takes place as a result of the fact that they help in the enhancement of the growth rate with a simultaneous reduction in the recession effects. Therefore, this ultimately allows the ones with low income in stretching their money much more as compared to other taxation systems.
• Requirement of ongoing payments:
The progressive system of taxation is usually termed as the “pay as you go” process. This highlights the fact that upon earning money, it automatically gets taxed. If an individual suffers from a sudden loss in their income, then there should not be any kind of imposed taxation burden. This should not be the scenario due to the fact that a pre-assessment of an individual’s earning capabilities are required to be authentically budgeted as well as registered.
Disadvantages of Progressive Taxes:
• Reduction of taxable income:
Under the system of progressive taxation, individuals can definitely suffer to a great extent. This is because it leads to the creation of such incentives which can certainly lead to the reduction of the taxable income. This has particularly been seen in the brackets system in the United States which allows the provision of various incentives on specific purchases.
Therefore, with a reduction in the taxable income level, the creation of incentives would have otherwise helped in avoiding the tax payments. This would have taken place within the range of the actual amount of the earned income.
• More expensive to implement:
Based on recent reports, it has been suggested that it takes nearly $20 billion for implementing the progressive system of taxation. After evaluating all the compliance expenses, the total amount is seen to be much more as compared to this $20 billion expenditure on an annual basis.
Therefore, by refraining from the use of this particular taxation system, it would definitely result in benefiting the economy to a greater extent.
• Encourages inequity:
It has been proven that under the progressive system of taxation nearly 47% of the population in the United States do not make any tax payments at all. However, upon considering both the state as well as the local taxes, it is seen that about 50% of the taxes are paid by the wealthier sections of the society only.
This therefore constraints the idea of creating a fair system with equal amount of shares within a society and thus encourages inequity.
• Affects at the bracket cutoff levels:
Under the progressive system of taxation, it has been proven that there are no chances of earning more amount of money due to lack of provision for incentives. This is especially the scenario when a householder’s earned source of income amounts to nearly a clear bracket cutoff.
For the ones who can successfully make it right into the next set of brackets, then the burden of their taxations can definitely be much higher as compare to the lower bracket ranges.
• Affects low-income earners:
Based on recent studies, it has been shown that effective taxation rates of nearly 17% on the total amount of income have impacted the progressive taxes. If any such households do not fulfill some basic deductions, then the effective taxation rates can remain much higher in a progressive system of taxation.
Conclusion:
The system of progressive taxation has gained the much deserved fame during the 21st century.It is carried out by the process of using certain tax brackets in the United States.
It has definitely contributed a significant amount of economic progress to the country. But at the same time, there are various households who have failed to earn a good amount of beneficiaries from the same.
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