Which taxation system is the best?

HL Economics

8/25/09

Scion

Section 3.6.

Which taxation system is the best?

There are three main taxation systems in the market: progressive, regressive, and proportional.

Progressive tax on income means when there is an increase in income, it also means that the percentage of tax paid will increase too. This creates a disincentive for the people who work hard for their high income since it attempts to reduce the tax incidence for the people with low income. Also, this system allows the people with low income to not pay their taxes since there is a minimum income level. While McGee’s describes the situation as “taking from the rich and giving to the poor” it help the people and community as the tax revenue is used for welfare.

Regressive tax is the opposite of Progressive taxation and it increases the percentage of the tax paid as income decreases. This becomes a problem since people with low income are already suffering through financial problems and is struggling to purchase necessity goods. However, this system can work as an incentive for people to work harder and earn more money. An increase in the production of goods produced in that country should benefit the laborers. At the same time, because some countries have safety nets it can be argued that the poor community receive more social welfare and transfer payments so they should be charged with higher taxes.

Proportional tax is a tax imposed so that the average tax rate is unchanged. This occurs because the percentage is unchanged at higher income levels and there are no marginal tax effect attached to it. This system can be seen as the fairest solution as it imposes an equal burden on the rich and poor. However this decreases the tax revenue and decreases the social welfare that is given to the poor and hurts them because they must pay the same percentage of taxes as much wealthier people.

When evaluating the three taxation systems, I think the proportional tax system benefits the people and the economy as is creates “equity” and an incentive for the people to worker harder and earn more. Although it does hurt the community who rely on social welfare, I think it stimulates the economy the most. 

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~ by scioneconblog on August 25, 2009.

3 Responses to “Which taxation system is the best?”

  1. haroo Scion,
    I like what you said about how it serves as an incentive for people to work hard!

    The Proportional Tax system promotes horizontal but not vertical equity. Do you think that the wealthy should pay the same portion of income on taxes than the poor? The poor usually spend more on consumption relative to their income (high marginal propensity to consume) so the same tax burden on the poor and wealthy would be more harmful on the poor.

    Y 🙂

  2. i think if you use the proportional method, people who live in the poverty line will suffer the most. If the poor are making enough money for their basic needs, they will have to sacrafice there needs and live in deeper poverty. It may encourage, the rich to make more money, but as a whole economy, the goal is the make the distance between the poor and the rich as close as possible, and i think thats true equity. But i think with the proportional method, the gap between the rich and poor will expand.

  3. Really nice posts. I will be checking back here regularly.

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