Because the structure of the personal income tax is progressive, a larger share of income is taxed at higher rates as real income increases
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Because the structure of the personal income tax is progressive, a larger share of income is taxed at higher rates as real income increases. Therefore, economic growth automatically results in higher taxes unless offsetting legislative action is taken. Do you think this is an attractive feature of the current tax system? Why or why not? |
Explanation
The progressive taxation system is one where the people are taxed based on their ability to pay.
People who earn greater income will have to pay tax at higher tax rates and people who earn lower incomes will have to pay tax at lower tax rates.
Usually the government creates certain tax slabs or tax brakets and the tax rates are defined accordingly.
The progressive taxation system is one where the tax rate increases from low to high according to income of people and hence, the average tax rate turns out to be less than the marginal tax rate of the people.
When economic growth occurs, the taxes increases simultaneously (as taxes act as automatic stabilizers) unless the government takes some action to control the same.
It is not an attractive system of the current tax system as when economic growth occurs, people who earn more are forced to pay at a higher tax rate which demotivates them to work hard or earn more and it actually encourages people to find ways to circumvent so that they can save hemselves from paying higher taxes.
They often find ways to look into the loopholes so that the tax burden for them falls by showing fake investments or engaging in illegal ways to launder money, so that their actual income appears lower than it is.
Answer
Progressive tax system is one where the people with higher income face a larger tax rate and the people with loer income face lower tax rate. It is helpful for the government as they are automatically able to raise their revenue (acruing through the taxes) when the economic growth in the country occurs. This revenue can be further used for providing public good like healthcare, infrastructure etc and add to the country's growth.
It is not an attractive feature of the current tax system as the progressive tax system lowers people's incentive to work hard and earn more or undertake higher investments or it motivates them to find ways around the system to save themselves from paying higher taxes.
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