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Progressive Taxation – Thought Process It’s Pros, ConsA 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 ProcessThere 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.
ProsThe 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.
ConsThe 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 TaxFlat 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.