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Progressive Taxation – Thought Process It’s Pros, Cons

A progressive taxation system is one where the tax slab increases considerably as the income increases. Thus, high-income individuals end up paying more taxes than what normal individuals would do. For that matter, the United State of America has a progressive taxation mechanism in place for its citizens. As an example, in the year 2016 individuals whose taxable income was below $9275 they ended up paying only 10% as taxes. On other hand, individuals whose taxable income was above $415,050 they ended up paying up to 39.6% as taxes.

Thought Process

There are two primary schools of thoughts when it comes to progressive taxation.

The first says, that the high-income individuals can bear the burden of more taxes.

However, the other school of thought says that this system kind of punishes the higher individuals who earn a lot. And in turn, also removes some motivation for people who want to earn more.

Pros

The first advantage of this system is that it lets people with lower income save more money from taxes so that they can spend or save.

As compared to flat taxation system or even regressive taxation system, a progressive taxation has the ability to extract more taxes.

As the income slab of individuals increase so does their tax liability. Individuals with access to greater amount of funds have the ability to improve the standards of services available for everyone.

Cons

The flip side to progressive taxation is its capability of being discriminatory towards the high earning individuals. A lot of people think this is a way of bringing down the income gap, as the taxes collected are used for social welfare programs. But reports suggest otherwise as social welfare programs gather up only a small portion of what the government spends usually.

Progressive Tax Vs Flat Tax

Flat taxation mechanism is on the other end of the spectrum when compared with progressive taxation. As the name suggests, the tax amount remains the same for everyone, regardless of how much they earn. An example of it would be income tax of 10%. It would remain the same despite the fact if you have low income or high income. As the tax is flat, it is same for everyone. Few countries have such a mechanism in place.

When you consider income tax for individuals under a certain slab, the taxation becomes a flat tax. All the individuals with income lower than the prescribed levels would end up paying the pre-fix flat tax.

Progressive Tax Vs. Regressive Tax

A Regressive tax is the opposite of progressive tax when it comes to the implementation. In this mechanism, individuals with lower income levels end up paying more taxes as compared to people who earn much more. If you consider goods or services, the charges levied on the same (sales tax) is lower for higher income individuals and higher for lower income individuals. Sales tax of the same amount on a particular good or service would comprise of higher percentage when you consider someone with lower income and compare it with high income individuals. The current taxation system followed in the US is progressive by nature. The system aims at charging individuals with low income, lesser taxes. Individuals with medium level income end up paying medium level taxes and high earning individuals pay a higher amount of taxes. It primarily follows a tax rate system that is incremental. The debate of it being fair or unfair for the wealthy is an ongoing process and there doesn’t seem to be an end to it. But by large and far this taxation system, according to several critics is the most reasonable system available to us. [/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]