Question

The tax burden and fairness issue has been a long standing debate at all levels of government. As an individuals circumstances change, how much should a taxpayer's burden change? Three possibilities exist: regressive distribution, progressive distribution, and proportional distribution. Discuss which option you feel is the most equitable and why? Not counting the question, your post should be 350 words

Answer 1

Tax is compulsory payments to government by individual and business entities. In terms of impact, tax is divided into regressive, proportional and progressive heads:

Regressive Tax: average burden of tax decreases as amount of income rises. Such type of tax affects lower income section adversely. Hence, Generally, such taxes are avoided by the democratic governments.

Proportional tax: This is an example of flat tax. All are made to pay certain percent of income as tax. Such tax generally affects equally to middle and higher income groups. Such taxes are also rare to see.

Progressive Tax: This is most popular tax in democratic governments. Liability of tax increases as income of individual increases. Hence, it satisfies the condition of horizontal and vertical equities. It assumes that people with higher income should be taxed at higher rate and people with lower income should be taxed at lower rate. Marginal utility of money decreases as income of individual income increases. Thus, such individuals should be taxed at higher rate.

Which tax system is better:

• No, government must adopt the regressive tax system as it would affect the poor section of society adversely. Such tax cannot be justified in democratic countries. Further, proportional tax also does not satisfy condition of vertical equity. Vertical equity demands that higher income group should be taxed at higher rate but it goes with single rate and again lower section of society would feel pinch of tax in relative term.
• Now , as we move to the progressive tax system, we see that here government maintain the principle of equity. Marginal utility of money is higher for poor people, thus they are not taxed at higher rate and rich class which has less marginal utility of money is taxed disproportionately. Vertically , equity is observed here.
• US government also adopts the progressive tax system when It comes to the income tax. Income is taxed based on the progressive principle. Rich class is taxed at higher rate and poor class is either taxed at lower rate or exempt.