Favour and Against Proportional Taxation

After reading this article you will learn about the arguments in favour and against proportional taxation.

Arguments in Favour of Proportional Taxation:

Proportional taxation has been advocated by the classical econo­mists as a protest against the injustice of the old system of exemp­tions and privileges. Adam Smith, stating that taxation should be adjusted to the abilities of the subjects, adds that it should be in proportion to the revenue which they respectively enjoy under the protection of the state.

Mc. Culloch and J.S. Mill were the two impor­tant advocators of proportional taxation. According to them burden of taxation should be made as far as possible, in proportion to re­spective revenues. Prof. Mc. Culloch remarked “where you abandon the plain principle (proportional principle) you are at sea without a rudder and compass, and there is no amount of injustice you may not commit”.

Whereas J.S. Mill opines that “a graduated income tax is an entirely unjust mode of taxation and in fact a graduated rob­bery”.

However the proportional taxation has been advocated on the following grounds:

(1) Simple and uniform under proportional taxation, tax rate is simple and uniform for all taxpayers. Hence the tax is not very much opposed by the taxpayers. Moreover, it is very simple to admin­ister and calculate the amount of tax.

(2) Proportional taxation satisfies the canon of certainty.

(3) Since each taxpayer pays a fixed proportion of income, it is a neutral tax and does not alter the relation between different in­come earners.

(4) It will not adversely affect the saving and productivity activities in an economy. It will not adversely affect the willingness to work more and save more of the taxpayers.

(5) Proportional taxation will not disturb the existing allocation of resources of the economy. The reason is that under proportional taxation the same amount of purchasing power is taken out of the pockets of the taxpayers.

Arguments against Proportional Taxation:

The modern view is that rate of taxation should be progressive:

(1) It will not lead to equitable and just distribution of tax burden. In reality it falls more heavily upon small incomes rather than higher incomes.

(2) Proportional taxation is inelastic in nature. The tax rate is uni­form for all levels of income. The governments growing revenue requirements cannot be met from proportional taxation.

(3) Proportional taxation does not help to reduce inequalities in the distribution income. The tax rate falls uniformly on rich and smaller groups alike. This type of taxation rather enhances the inequalities in the distribution of wealth.

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