Tax
A tax (from the Latin taxo; "rate") is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many administrative divisions. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent.
According to Black's Law Dictionary, a tax is a "pecuniary burden laid upon individuals or property owners to support the government [...] a payment exacted by legislative authority." It "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government [...] whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name."Characteristic :
- Taxes are imposed by the government only.
- A tax is compulsory contribution of the tax payer.
- Payment of a tax is the personal obligation of the tax payer.
- The aim of taxation is the welfare of the community as a whole.
- A tax is a legal collection.
- An element of force is there.
Classification
Direct and Indirect Taxes
Taxes have been broadly categorised into direct taxes and indirect taxes. Dalton made a distinction between direct and indirect taxes as "that a Direct Tax is really paid by a person on whom it is legally imposed while an indirect tax is imposed on one person, but paid partly or wholly by another owing to a consequential charges in the terms of some contract or bargaining between them".
A direct taxes involve a direct money burden and in the case of indirect taxes, the man who pays the tax to the government is different from the person who bears it ultimately.
Merits of Direct Tax:
- Economy
- Certainty
- Equity
- Reduction in inequalities
- elasticity
- Civil consciousness
Demerits of Direct Tax:
- Unpopular
- Inconvenience
- Possibility of injustice
- Possibility of evasion
- Exemption of low income group
Merits of Indirect Tax:
- Convenient
- Difficult to evade
- Elastic
- Equitable
- Can be progressive
- Productive
- Wild Coverage
- Social Welfare
Demerits of Indirect Tax:
- Regressive
- Administrative cost
- Reduction in savings
- Uncertainty
- No civil consciousness
Generally speaking, the burden of indirect taxes tends to fall more heavily on the poorer sections of the community and that of the direct taxes mainly on the richer sections of the community. They both are not competitive but are complementary. That is why Gladstone, the great Victorian statesman, remarked that the direct and indirect taxes should be viewed as equally attractive sisters, neither of whom should be pursued too ardently.
Proportional and Progressive Taxation
Proportional and Progressive Taxation
Taxes may be divided into proportional and progressive basing on the burden of taxation.
- Proportional Taxation:
P.E. Taylor says, "A schedule of proportional tax rates is one in which the rates of taxation remains constant as the tax base changes". The amount of tax payable is calculated by multiplying the tax base with the fixed rate. Thus, in proportional tax system the multiplier, i.e., the rate remains constant with the change in multiplicant (Income).
Case for/Merits:
1) Proportional tax does not affect the relative position of the tax payer.
2) Proportional tax is simple to estimate and calculate and the imposition is uniform.
3) The willingness to work more and save more of the tax payer is not adversely affected by the proportional taxation.
4) The principle of equality of justice is being followed in proportional taxation.
5) 'Equality of sacrifice' as between the rich and the poor can be achieved by it.
Mc Culloch, a well known supporter of proportional taxes says, "When you abandon the plain principle (of proportion) you are at sea without rudder and compass and there is no amount of injustice you may not commit."
Case against/Demerits:
1) A system of proportional taxation would not lead to equitable and just distribution of the burden of taxation as it falls more heavily on the small incomes than on the high incomes because the marginal utility of money diminishes more rapidly as the income increases.
2) A system of proportional taxation means the tax rates for the rich and the poor are the same. Hence, the State cannot obtain from the richer sections of the community as much as they can give.
3) The proportional tax system, however, cannot be elastic as the financial needs of a government may change from time to time and it is often required to have more funds.
- Progressive Taxation:
P.E.Taylor says,"A schedule of progressive tax rate is one in which the rate of taxation increase as the tax base increases". In the case of progressive tax, the multiplier (i.e., the rate) increases as the multiplicant (income) increases.
Case for/Merits:
1) Proper distribution of money: Since progressive taxation allows income-based taxes, a person with low income will pay much less than a person with a high income. This is an effective way for proper distribution of wealth.
2) Protects the lower income group: Progressive taxation system allows the lower income group to pay less in taxes. Since most of the working population falls in this category, progressive taxation is favored by most.
3) Protection during recession times: Progressive taxation system also protects people during recession times because if their income drops, they fall into lower income bracket.
4) Stable income stream: Progressive taxation also allows the government to have a stable income stream even in times of depression.
Case against/Demerits:1) Opposes equality: Many believe that progressive taxation opposes the Constitution which promotes equal rights for citizens. By taxing the higher income group at a higher rate, progressive taxation defies the Constitution.
2) Prevents taking high paying jobs: Progressive taxation system may also prevent individuals from taking a high paying job because most of their income would be taken away as taxes. It also discourages individuals to work harder to gain higher incomes.
3) Encourages emigration: High progressive taxation system can encourage high earning workers to move overseas to escape the tax system.
4) Encourages hiding of assets: High progressive taxation system can also encourage high income earners to opt for off-shore banking by which they can hide their assets and save taxes.
P.E. Taylor says, "A schedule of proportional tax rates is one in which the rates of taxation remains constant as the tax base changes". The amount of tax payable is calculated by multiplying the tax base with the fixed rate. Thus, in proportional tax system the multiplier, i.e., the rate remains constant with the change in multiplicant (Income).
Case for/Merits:
1) Proportional tax does not affect the relative position of the tax payer.
2) Proportional tax is simple to estimate and calculate and the imposition is uniform.
3) The willingness to work more and save more of the tax payer is not adversely affected by the proportional taxation.
4) The principle of equality of justice is being followed in proportional taxation.
5) 'Equality of sacrifice' as between the rich and the poor can be achieved by it.
Mc Culloch, a well known supporter of proportional taxes says, "When you abandon the plain principle (of proportion) you are at sea without rudder and compass and there is no amount of injustice you may not commit."
Case against/Demerits:
1) A system of proportional taxation would not lead to equitable and just distribution of the burden of taxation as it falls more heavily on the small incomes than on the high incomes because the marginal utility of money diminishes more rapidly as the income increases.
2) A system of proportional taxation means the tax rates for the rich and the poor are the same. Hence, the State cannot obtain from the richer sections of the community as much as they can give.
3) The proportional tax system, however, cannot be elastic as the financial needs of a government may change from time to time and it is often required to have more funds.
P.E.Taylor says,"A schedule of progressive tax rate is one in which the rate of taxation increase as the tax base increases". In the case of progressive tax, the multiplier (i.e., the rate) increases as the multiplicant (income) increases.
Case for/Merits:
1) Proper distribution of money: Since progressive taxation allows income-based taxes, a person with low income will pay much less than a person with a high income. This is an effective way for proper distribution of wealth.
2) Protects the lower income group: Progressive taxation system allows the lower income group to pay less in taxes. Since most of the working population falls in this category, progressive taxation is favored by most.
3) Protection during recession times: Progressive taxation system also protects people during recession times because if their income drops, they fall into lower income bracket.
4) Stable income stream: Progressive taxation also allows the government to have a stable income stream even in times of depression.
Case against/Demerits:1) Opposes equality: Many believe that progressive taxation opposes the Constitution which promotes equal rights for citizens. By taxing the higher income group at a higher rate, progressive taxation defies the Constitution.
2) Prevents taking high paying jobs: Progressive taxation system may also prevent individuals from taking a high paying job because most of their income would be taken away as taxes. It also discourages individuals to work harder to gain higher incomes.
3) Encourages emigration: High progressive taxation system can encourage high earning workers to move overseas to escape the tax system.
4) Encourages hiding of assets: High progressive taxation system can also encourage high income earners to opt for off-shore banking by which they can hide their assets and save taxes.
No comments:
Post a Comment