Question

We discussed the advantages and disadvantages of the Progressive system. What disadvantage could a Regressive system have? Do they outweight the disadvantages of the progressive system? why or why not?

please answer ASAP

Answer 1

Regressive Taxes are based on flat rates and increased tax burden on lower income classes due to major portion of their income will go towards consumption.

Disadvantages of Regressive System:

1. It burdens the poor and having the low levels of income than the people who are having higher levels of income. Poor people will pay more percentage of their income towards regressive taxes than that of rich.
2. As most of the regressive taxes are consumption based taxes, Tax revenue will reduce if the consumption reduces.
3. An increase in existing rate of Tax may discourage some consumers to reconsider the purchase of particular service or product is essential.
4. Regressive taxes discourages consumption. More consumption means more taxes. Discouraged consumption will lead to lower investments in the economy.
5. Regressive taxes are not easy to administer as they are based on consumption of products or services.

Progressive system takes into account ability to pay. Tax rates are based on levels of Income.Let us briefly point out disadvantages of progressive tax system. They may be summarised as reducing the incentive to work and save, lower scope of participation in governance for the rich who pays more taxes where middle and lower classes elect the government, more benefits to the poor who pay less taxes, scope for tax evasion, opposite to equality, reduced amount for investment etc.

Generally, the disadvantages of regressive taxes outweigh the disadvantages of progressive system. This is because these taxes

• Affect entire population
• Discourages consumption which in turn reduce the economic activity
• Can't take care of uneven income or wealth distribution in the economy
• Costs of administering

Also, the disadvantages of regressive taxes may not outweigh the disadvantages of progressive system. This is because

• Regressive taxes are intended to discourage unhealthy habits (Sin Taxes on Tobacco and liquor)
• In the economies where percentage of poor is relatively low
• Huge differences in progressive rates and very high percentage of taxes on rich
• Tax evasion is not controlled
• Investments and incentives to work and save are effected due to high percentage of taxes on rich