Taxes are an important source of revenue for the government and progressive tax is one of the structures of the tax system, it refers to that system in which as the income of the individual increases his or her tax liability will increase and vice versa. In simple words progressive tax as the name suggests is the tax on the progress the more an individual progress the more will be his or her income and more will be the tax liability of the individual. In order to understand more about progressive tax let’s look at some of the advantages and disadvantages of progressive tax –
Advantages of Progressive Tax
- The biggest advantage of progressive tax is that under this structure those people who earn more income will pay more tax and those people who fall under lower income category will pay less tax, hence in a way this system puts more pressure on more capable or rich person while puts less pressure on less capable or poor and middle-class person.
- Another advantage of this system is that it gives sense of satisfaction to the people in the country because there is proper distribution of taxes as people earning more income are made to pay more taxes and people earning less income have to pay lesser taxes which in a way helps in reducing income inequality between the rich and poor.
- Another benefit of progressive taxation is that government gets good amount of revenue because in normal taxation many middle class and lower class people do not pay taxes due to higher rates but due to lower income tax rate in progressive tax system majority of such people will pay taxes leading to increasing in taxable base of the country and higher the tax base higher will be the tax collection by the government.
Disadvantages of Progressive Tax
- The biggest disadvantage is that in a way this form of taxation punishes those people who work hard in order to earn money and hence in a way it discourages people to work hard because there is no incentive for people to work hard because the more the income the higher will be the tax rate and a person after earning enough money will stop working because marginal utility of money for an individual will decrease due to higher tax rates.
- Another limitation is that there will be more cases of tax evasion as rich people will feel that they are being exploited and they will try to use all possible ways to make sure that they pay less tax and hence in a way under this system there is an increase in tax evasion by the high tax paying individuals.
- Another disadvantage of a progressive tax is that it has the scope of manipulation by the tax authorities because there is no uniform rate and rate of taxation varies according to income which makes this system subjective and dependent on the personal opinion of the tax officials.
As one can see from the above that progressive tax has benefits as well as limitations and it is up to the government to decide whether it wants to implement progressive taxation system in the country or not.