Taxes are one of the greatest source of revenue for the government and each economy given its structure and objectives utilizes a tax system, under the three tax systems. The question posed here is how much should a single individual pay and how can we charge each individuals given factors such as income.
Tax rate systems:
1. Progressive tax
2. Proportional tax
3. Regressive tax
Progressive tax rate system
In a progressive tax rate system the higher the taxable amount the higher the rate. This means higher income leads to higher taxes, so the more you earn the more you pay hence referred to as the PAYE meaning Pay As You Earn. This tax rate system is recommended because it thrive to meet one of the five macroeconomic objective that to equitably distribute wealth, and it had been corroborated that poor people spend a large proportion of their income than rich people. Presume as the reader you earn $20 000 per month and as the blogger I earn only $100 per month. The government endeavoring to equitably distribute income and reduce economic inequality, will impose a higher tax rate on you because you earn more than I do and suppose your income increases to $40 000 you will be charged more or double the tax rate. This is because of the PAYE. Furthermore the marginal tax rate is greater than the marginal tax rate.
As the poor and low-income individuals spend an enormous proportion of their income, redistributing wealth to them and permitting them to pay less tax induce an increase in aggregate demand taking to account that generally the population of a nation is dense with low-income people more than rich-people. This results in economic growth and a reduction in unemployment.
However rich people do not support this tax rate system because it tend to reduce investment spending in the economy as generally businesses are owned by rich people. A deterioration in investment spending lead to a decline in the production and aggregate spending.
Regressive tax rate system
Regressive tax rate system is the exact opposite of the progressive tax rate system. This systems favors the rich and the high-income population as the higher your income the lower your tax rate. This means the more you earn the less you get to pay. This tax rate includes estate tax, indirect taxes on goods and ‘sin tax’. Using the previous example that suppose the reader earns $20 000 per month and the writer only earns $100 per month, the writer will have more tax burden than the reader under regressive tax rate system. The proponents of this tax rate system may say this implicitly reduces unemployment as people are bind to work hard and get paid more to pay less tax, pushing the massive number of people from the low-class to the middle-class and high-class. It also reduces the pressure on the government of attempting to redistribute income to the poor while critics of progressive tax believe they are encouraging people to remain poor.
Critics of this system put it in a funny language that this promotes the notion that “the rich get richer and the poor get poorer”.
Proportional tax rate system
In an effort to create stability and avoid controversy as we have seen when the government uses a progressive tax rate system it benefits the poor at the expense of the rich, whereas when imposing a regressive tax rate system “the poor get poorer and the rich get richer”, some economies introduced this tax rate systems, also known as the flat tax. The proportional tax rate system refers to everyone paying the same amount of tax, whether you are rich or poor the tax rate remains the same. In this case, the marginal tax rate is equals to the average tax rate. This promotes equity instead of equality having said everyone pays the same amount of tax regardless of their wealth.
Using the same old example with the reader earning $20 000 per month whereas the writer earns only $100, the tax rate is 15 percent for both.
As introduced the concept of equity and equality, critics of this tax rate allege people pay what they do not deserve to pay, submitting that for instance a person earning $20 000 and a person earning $100 cannot share the same burden, this is analogous to treating a heavyweight and a lightweight similarly, giving them equals matches while they both different strengths and weaknesses.
Critics of this tax rate system say the progressive tax rate system is much better than the proportional tax rate system and that high-income should be charged more as they earn more.
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