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Explain the demerits of progressive taxation.

      

Explain the demerits of progressive taxation.

  

Answers

Judy
1. Faulty Basis
Progressive taxation is based on the principle of diminishing MU of income which is faulty. Utility is subjective and it cannot be measured and compared in terms of money. Therefore, it is
not right to have a progressive tax system based on subjective utility. Despite this faulty assumption of diminishing marginal utility of income, the progressive tax system is working satisfactorily in every country.
2. Arbitrary
Progressive taxes are arbitrary because there is no scientific or standard method to fix the rate of progression. There can be infinite scales of progression depending on the whims of the finance secretary or the finance minister. No doubt, there is no method to fix the rate of progression. But there are legislators to check the arbitrariness of the finance department in every country.
3. Discourages Capital Formation
Progressive taxation adversely affects saving, investment and capital formation. It is the high income groups who are the main source of savings in a country. Heavy taxes on them discourage saving and investment and thus hamper trade and industry in the country.
4. Unjustified
Critics point out that progressive taxation is an unjustified method. People become rich through thrift and hard work. Those who are extravagant and lazy remain poor. Taxing the high income groups at high rates is unjustified. But this criticism is not valid because it is not only through thrift and hard work that people become rich. There are other factors like entrepreneurial ability, favorable economic environment, etc. that make people wealthy. Similarly, extravagance and
Laziness do not make people poor. Poverty may be the result of economic and social factors.
5. Tax Evasion
Progressive taxation leads to tax evasion and avoidance. People, who are taxed heavily, try to evade taxes by maintaining false accounts and submitting false statements to income authorities.
They also try to avoid taxes by finding loopholes in the tax laws. This is no valid argument because all types of taxes can be avoided and evaded. Payment of taxes depends on the social and tax consciousness of the people.

Judiesiz answered the question on July 7, 2018 at 00:10

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