Posted on: November 3, 2021 Posted by: Alina Barber Comments: 0

A tax is a required financial burden or any other sort of levied financial obligation payable by a taxpayer to a governmental entity in return for the payment of tax. Evasion of or refusal to pay tax, and delinquency of payment, is punishable by criminal law. In the United States, federal tax law is known as Internal Revenue Code, while state tax law is called State Tax Law. Tax law is an important aspect of everyday life and an excellent opportunity to learn about taxation.

Old tax regime introduced via legislations was based on unequaled tax rates levied directly on income. This was a major disadvantage for taxpayers as direct tax was a source of considerable income and wealth for them and they therefore had a strong hold on it. A major way of taxing individuals was to charge a progressive tax on wealth, with exemptions on sources of income such as dividends, interest, rents and so on. For this reason, rich taxpayers enjoyed a high degree of economic power and control over tax planning.

The regressive tax system was another system whereby a high-income earner had to pay taxes on income only to the extent of his income. There was no ceiling on the amount of taxation. Another important feature of this system was that it benefited only the high-income earners, leaving the poor and medium-income earners with essentially the same tax rate. A major disadvantage of the regressive tax system was the unequal treatment of incomes. There was no allowance for economic conditions that would trigger increases or decreases in tax rates. Even today, when many countries have a progressive tax system, the regressive feature is still evident.

In contrast, proportional taxes are based on a sliding scale of taxation. A higher level of income means a higher level of taxation. So, a person with a modest income would have to pay a smaller amount than somebody with a high-income. Proportionate tax systems are also fair, since the poor and middle-class people are charged the same amount irrespective of their income. In this respect, the United States and most Western countries have moved away from proportional taxation towards the regressive system. On the other hand, the European countries, Japan and some Asian countries, have maintained a high level of progressive taxation because they have a strong labor and product base.

The biggest problem with progressive taxation is that it leads to under-provisioning of social security benefits and other government programs that are necessary for a more secure environment. Proportional taxes deny low-income people the opportunities to pursue education and further their education. There are various other disadvantages that accompany a progressive tax system. The topmost disadvantage is that it makes the distribution of income more unequal. It also adversely affects the credibility of the national currency, as goods and services obtainable only at a regulated price can only be afforded by those who are in a position to pay the taxes.

A major drawback of progressive taxation is that it is regressive. That is, it only treats the incomes of high-income earners and does not treat the incomes of low and middle-income earners. Moreover, it denies low and middle-income earners the opportunity to enjoy essential public services like education and health care. Thus, while a flat tax system allows everyone to avail of public services, a progressive tax system denies them access to these services. On the other hand, a proportional tax system is beneficial for all groups, but also helps them to share the income and resources available to all segments of society.

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