What is Progressive Tax?
The progressive tax system is in use in many countries. Under this system, the tax rate increases with the increase in the taxable income. The tax is progressive in the sense that the rate of tax rises with the increase of the taxpayer’s income. This has an impact on the taxpayer’s mean tax rate being lesser than the individual’s marginal tax rate. Progressive tax is applicable to individual taxes or in a tax system as a whole, annually, semi-annually, or for a lifetime. The opposite of a progressive tax is a regressive tax. The major aim of a progressive is to shift the tax burden from individuals with a lower ability to those with a higher ability to pay. Suffice to say, where the tax burden can be borne without major strains.
Computation of Progressive Tax
There are two methods of computing progressive tax. These are slope-intercept form and point-slope form. When using the slope-intercept form, an individual’s tax is computed as the tax of the marginal amount within the tax bracket, plus the tax on the bottom amount of the bracket. An alternative tax computation method considers the tax on the overall amount, minus the figure that exaggerates tax on the base end of the bracket.
Progressive tax is associated with happiness and a sense of satisfaction among the citizens of a country. This tax applies to luxury goods such ornaments, gold watches and such other goods, which raise a person’s social status. On the other hand, the progressive tax is waived on basic commodities such food, clothing, education, and public transportation. The net result is the improvement in the quality of lives led by citizens. Governments use progressive tax to reduce the income of high earners. The tax helps fund social programs, which benefit low-income earners. Critics label this type of tax as class warfare. Those against it think it is envious. However, most people agree that in a sense, progressive tax helps in achieving social justice and hence reduces the animosity and ill feeling, which abound between the rich and poor.
Progressive tax in its nature of administration helps in income redistribution. This, however, happens if the government focuses on welfare programs such as social payments. The effect of reducing income inequality cannot work if progressive tax attracts increased tax evasion. With reduced income inequality, there is greater demand, as regular consumer goods and services are affordable to the people who need them.
Effects of Progressive Tax on Economic Growth
Though famed for its ability to attain income redistribution and social justice, studies indicate that there exists a negative interrelationship between progressive tax and meaningful economic growth. Since high-income earners are the ones involved in great saving, investing, risk-taking and high productivity labor, the progressivity of taxes undermines investment, risk-taking, entrepreneurship, and productivity. This is so because people may shy away from investing since the progressive tax will take away a considerable chunk of their gains. The low-income earners may also lie in the comfort that progressive tax cushions them from dire lack of necessities. They may thus lack the incentive to grow their income. Instead, they may choose to remain in the low-income bracket to continue enjoying low tax.