Question

Explain tax progressivity

Answer 1

Tax progressivity refers to the process of imposing tax at lower rate to low income groups compared to high income groups. It is based determined on the basis of ability of the taxpayer. It helps to reduce the burden on taxpayers. Under progressive tax system the tax burden of an individual and taxable income have direct relationship. It is also applied to selective tax, tax exemptions and tax credits which create progressive tax effect. It helps to reduce the inequality among tax payers. Tax credits, tax on interest earned and estate tax are some of the examples of progressive tax.

The main advantage of progressive tax is that it provides a sense of satisfaction to citizens of the country. This system ensures proper distribution of tax and reduces the inequalities among rich and [poor. Progressive tax benefits the government. The people with low income will not pay if there is higher tax. But under progressive tax every pays tax though they feel government is concerned about them.

The diaadvantages of progressive tax system are the chances of tax evasion are higher. Because the high income groups will usually have higher tax burden so they escape from payment of tax. There is higher chances of tax manipulation is there under progressive tax. Different income groups have different tax rate thus it easy to conduct manipulation.