< Previous | Contents | Next >
There are three methods of taxation prevalent in economies with their individual merits and demerits.
This method has increasing rates of tax for increasing value or volume on which the tax is being imposed.7 Indian income tax is a typical example of it. The idea here is less tax on the people who earn less and higher tax on the people who earn more—classifying income earners into different slabs. This method is believed to discourage more earnings by the individual to support low growth and development unintentionally. Being poor is rewarded while richness is punished. Tax payers also start evading tax by showing lower unreal income. But from different angles this tax is pro-poor and taxes people according to their affordability/sustainability. This is the most popular taxation method in the world and a populist one, too.
This is just opposite to the progressive method having decreasing rates of tax for increasing value or volume on which the tax is being imposed.8 There are not any permanent or specific sectors for such taxes. As a provision of
promotion, some sectors might be imposed with regressive taxes. As for example, to promote the growth and development of small scale industries, India at one time had regressive excise duty on their productions—with increasing slabs of volume they produced, the burden of tax used to go on decreasing.
This method while appreciated for rewarding the higher producers or income-earners, is criticised for being more taxing on the poor and low- producers. This is not a popular mode of taxation and not as per the spirit of modern democracies.
In such a taxation method, there is neither progression nor regression from the point of view rate of taxes point of view. Such taxes have fixed rates for every level of income or production, they are neutral from the poor or rich point view or from the point of view of the levels of production.9 Usually, this is not used by the economies as an independent method of taxation. Generally, this mode is used as a complementary method with either progressive or regressive taxation. If not converted into proportional taxes, every progressive tax will go on increasing and similarly every regressive tax will decrease to zero, becoming completely a futile tax methods. That is why every tax, be it progressive or regressive in nature, must be converted into proportional taxes after a certain level.