Proportional Taxation

What is Proportional Taxation?

Proportional taxation is a type of tax system in which the tax rate is fixed or constant, regardless of the taxpayer’s income or financial situation. This means that everyone pays the same percentage of their income or wealth in taxes.

For example, if the tax rate is 10%, a person earning $50,000 a year would pay $5,000 in taxes, while a person earning $100,000 would pay $10,000 in taxes. The tax rate remains the same for both individuals, but the amount of tax paid is proportional to their income.

Proportional taxation is often used in flat tax systems, where a single tax rate is applied to all taxpayers.

Arguments in Favor of Proportional Taxation:

(1) According to classical economists, the objective of taxation should not be to alter the relative position of the tax-payers. Hence, they advocated proportional taxation, as it does not affect the relative position of the tax-payer.

(2) Proportional taxation has been advocated on the ground of simplicity and uniformity. Since the tax rate is uniform for all taxpayers, the taxation is not very much opposed by the taxpayer, as in the case of progressive taxation, since, it is simple to estimate and calculate the amount of tax for the government and the tax-payer; therefore, it also satisfies the canon of certainty. Hence, a proportional tax system has been regarded as better than an arbitrarily graded progressive tax.

(3) Proportional taxation has also been supported on the ground that the willingness to work more and save more of the taxpayers is not adversely affected by proportional taxation as may be the case in progressive taxation.

(4) The principle of equality or justice has been justifies on the ground that the monetary burden increases in the same proportion as the income increases.

Adam Smith’s first maximum of taxation was, “The subject of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities, that in proportion to the revenue which they respectively enjoy under the protection of the State.” Here, it is a clear recognition that what an individual ought to contribute should be determined with reference to his income, and not to some external and haphazard indication of his ability. But more important for our present purpose is his emphasis upon proportional contribution “in proportion to their respective abilities” which can undoubtedly be interpreted as favoring progressive taxation if it can be shown that the increase in ability is more rapid than the increase in income. But Smith was unaware of the more recently developed principle of diminishing utility of money; consequently “in proportion to their respective abilities” carried for him a meaning identical to, “proportion to the revenue which they respectively enjoy.”

Upto the end of the 19th century, the essentially unanimous opinion of writers on the subject supported the view that fairness of justice in taxation calls for taxation at proportional rates. The exceptions were those few “radicals” who advocated taxation for purpose of equalizing wealth and income rather than for revenue. However, proportional taxation unquestionably carries simple implications of justice and equality.

Objections to Proportional Taxation:

On the other hand, the supporters of progressive taxation and the critics of proportional taxation argue that:

(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. Hence, the sacrifice involved in paying of a tax in proportion to the income is greater for the poor than for the rich. But justice requires that the sacrifice made by each taxpayer in paying a tax should be equal. Therefore, the rich should be taxed at a higher rate than the poor.

(2) A system of proportional taxation means that 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. Therefore, in modern times, with the increasing financial needs of the government, such a system may fail to provide adequate resources to the government and justice in taxation.

(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. But, if the tax rate for the smaller income group is already heavy and can not be raised anymore, this would imply that the tax rate for the higher income groups also cannot be raised as under the proportional tax system all should be taxed at the same rate. Hence, the government may not be able to increase its revenue in times of emergency. Therefore, the system is not elastic.

Hence, the proportional tax system suffers from the defect of inequitable distribution of the burden of taxation, lack of elasticity, and inadequacy of funds for the increasing needs of the modern government.

Points of Controversy between Anglicists and Orientalists
Revolt Of 1857
Early Indian Nationalism
Moderates and Extremists
Causes For The Rise Of Extremism
Revolutionary movement in India for the freedom struggle
Vande Mataram Movement (1905-1909)
Simla Deputation 1906 (Separate Electorates)
Muslim League [December 30, 1906]
The Morley-Minto Reform or the Indian Council Act 1909
The Ghadar Party Movement 1913
Towards Modernity– Tamil Board

Comments (No)

Leave a Reply