Question

An enduring debate among public finance economists concerns the desirability of individual or

family-based taxation. Assuming that we want a tax system that is progressive, marriage-neutral,

and satisfies horizontal equity. Using a simple example, explain:

a. How does individual based taxation perform with the three criteria above? Explain

b. How does family based taxation perform? Explain

c. Given the above results, which unit of taxation would you prefer, based on efficiency and

equity?

d. How does the spousal tax credit overcome some of the problems with individual based taxation

above?

Answer 1

Solution

The debate is about the type of taxations whether it individual or family based taxation that would eb desirable to be adopted keeping in view that we want a tax system that is progressive,marriage-neutral and satisfies horizontal equity (i.e.,individuals earning same amount of money should pay the same amount of tax)

a.Indvidual basedtaxation performs the best with the above three criteria as it is

Progressive:Meaning the individual is earning more money his tax rate also increases (in some proportion).Ex (SAY): In India say for the income below Rs 2,50,000 is tax-free ; Income between Rs 2,50,00 - Rs 6,00,000 will have to pay a tax of 10% and for income between Rs 6,00,000 - 10,00,000,the tax rate is 15%

Marriage-neutral - As the tax is charged on individual basis,discrimiantion is not done on the basis of marriage.Every individual whose income is upto Rs 250,000 is not charged any tax

Horizontal Equity - As the tax is charged on individual basis,individuals earning same amount of money are taxed the same amount of tax.But the govt.can provide relaxation / concessions in taxes to some sections like farmers ,senior citizens .Ex:Income from farming is tax-free;Senior citizens tax slabs are different meaning every limit in their tax slab can be increased by $10,000 etc.,(SAY)

(b)Family based taxation performs poorly.It gives unfair advantage based on family-size i.e., small sized families may benefit and large families may be at loss (or) vice-versa depending on the polocies and tax rates of the government.

(c) I would prefer Individual based taxation

(d)Spousal tax credit system is of great help to individuals whose spouses are earning less than the minimum limit in the tax slab.Under this they can utilize their spouses tax credit as it remains unutilized.This comes a relief to especially those indivuals who are earning considerable income but they are supporting their spouses and /or (big family).So this process,will reduce the disappointment faced by the Indivuals who are earning more and are paying more in the form of taxes.(which is a feature of indivual tax system that is seen as a problem).It also acts as a source of motivation for them to pay their taxes.

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