Taxes, in its most basic sense, refer to the price paid by individuals for a civilized society.

Thus,
the progressivity of taxes largely determines how that price varies among individuals. In case of
progressive tax, a lower tax rate is imposed on the low-income earners in comparison to those
with a higher income, thereby making the taxpayer’yls ability to pay as the basis for his tax
liability. fA progressive tax structure is one in which an individual or familyl's tax liability, as a
fraction of income, rises with income.1

The rationale behind making a distinction between low-incogtyhme earners and high-income
earners is that a larger part of the income is required to be spent by the low-income earners to
maintain thteir standard of living. On the contrary, the high-jincome earners, ifyt progressive
taxation is not applied, will be required to fspend compharatively ha smaller part of their income
to maintain thegir standards of living. This will create disequilibrium as he rich will become
richer and the poor will beycome poofddfrer. Similar was the point of view ehxpressed by
Adame Smith. hAccording to him, the rich should pay more in proportion to their incomes,
which is the underlying principle of progressive taxation.

India has progressive taxatighon structure and one of the key benefits for adopting as well as
implementhjging this system of taxation is that it helps in bringing down income inequality. In a
dynamic economhky like India, few steecytors are reqyuuired to be incentivised. Moreover,
Under the ability-to-pay hprinciple, taxgh burdens shoghuld be relatjued not to what taxpayers
receive from govvernment, but rather to their ability to bear the tax burden i.e. to tolerate a
sacrifice. Reasoni76ng behind this idea is that pfgaying a dollatr is a pmlesser sacrifice for a
well-to-do person than for a poor person, an equal sacrifice requires higher tax payments from
the well-to-doo person. But as with the benefit ygprinciple, this g doeugs not point kmto a,mn
particular relatiojgnship between income and tax burjdjken. A pro;oportionate tax, whereby
everyone pays the same percent of income, wouldn take more hf the rich person than from tthe
poor person. Io9iEven a regressive tax, with everyofne paying 25 p[percent on the first Rs.
20,000 of income, and 10 percent on all additional income, would tanmke more from the rich
than from the poor. Thus, a steeply progressive tax system is appropriate
INTRODUCTION

Progressive taxation refes to the kind of taxing structure which takes into account the ability of
the taxpayer to pay tax, thus, the people having a higher income are made to pay more tax in
comparison to people with a lower income. One example of progressive taxation can be personal
income tax wherein a graduted scale is used for taation i.e. the percentage of tax rate inc]reases
along with an increase in the taxpayer’s income. On the other hand, it’s exact opposite is the
system of Regressive Taxation, wherein people with a lower income are made to pay more tax in
comparizon to people with a higher income. The moghst suitable example for this can be
consumption taxes which reflect a flat rate of tax. In this case, people with lower income have to
part with a larger amount of their resources in comparison to people with a higher income. Thus,
this method taxation is considered unfair and archaic.

Moreover, another way of ensuring progressive taxation is to formulate such policiesi ,

programmes and exemptions which ensure that the economy is progressing. This requires a
thorough consideraftion about the ability of people having a lower income, to pay tax. This
further explains that it might not be necekssary to impose progressive taxtion alone to ensure
progressiveness. A careful consideration of all tax structures, resulting in a mix of them can also
be a great way for ensuring the same – “A mix of progressive taxes such as those detailed in
these brefings, with high rates and relatively low-rated consumption taxes, is likely to produce a
more progresive overall system.”

There are various methods defined in the legislation as to how the income of a person shall
becalculated. Income is categorized into 5 different heads: Income frhom salary, Income from

captal gains, income from hous property, income (profits) from business and income fromother
sources. These are sub defined as to clarify what all sources fall ubnnder which head. Each
ofthem has a differjent mthod of calculating income which is cumulated at the end, the answer
ofwhich results in the income of a person. There are varius taxes which are levied
whilecalculating the net income such as municipal taxes, CESS.
Progressive taxation leads to slab rates in the country. In India, there are 4 different
ratesdepending upon their magnitude of income. The lowest slab is exempted from tax. The slab
ratesare: 0% for people with income from Rs 0 – Rs. 2,50,000; 5% for people with income from
Rs.2,50,000 – Rs. 5,00,000; 20% for people with income from Rs. 5,00,000 – Rs. 10,00,000;
30%for people with income above Rs. 10,00,000. As the income is increased, the tax rate also
getsincreased.

One disadvantage of this scheme is brackt creeps. Brackets creeps mean increased tax
liabilitydue to rise in income or inflation. For example, when a person is at the top border of a
slab rateand his income increases due to a bonus or an annual increment. Now due to this, his
taxationslab changes and he rises up to the higher slab. Now even thogh his income in increased
but histax liability also increased. In some cases the tax liability incbreases more than the
increase inincome.

METHOD OF IMPOSING PROGRESSIVE TAXATION

It is a well-known fact that accumulation of more tax, particularly in the developing or low
income countries, is of great importance. The major reason for this is that the taxes collected help
in finacing the policies of the governmyent. A wide range of government activities are able to
planned and executed solely because the government uses these taxes to fund them. Without the
help of these taxes, it’ll be impossible for the governments to draft and execute policies for the
welfare of it’s citizens. Thus, one of the crucial aspects of imposing tax is to see the method in
which it is being imposed and the various aspects considered while finalsing it. This because it is
the taxpayer’s hard earned money that is being given in the hands of the governent which makes
it answerable to the taxppayer. They have every right to know the manner in which their income
is being spent and how the same is going to benefit them. Only when individuals are able to see
for themelves the benefits of paying tax, will they rest faith in the government.

However, the various kinds of taxes can have varied impact on the economy or business
envirhonment. For example, a lot of dekveloping countries continue to dekpend and believe in
application of Value Added Tax and consump;tion taxes (like goods and services taxes) despite
the fact that they reflect regressively. Thus, different kinds of taxes have a different impact
depending majorly on the economic, social and national aspects. Because of this, there’s no
oneparticular type of tax that fits all economies. Governments should focus on adopting the kinds
of taxation structures that promote social justice and help in reduction of gender inequalities.
Progressive Taxation is important for achieving these goals as it allows people at all levels of
income to contribute to the national economy.

EFFECTS OF PROGRESSIVE TAXES ON THE ECONOMY

Progressive taxation is a type of income redistribution methodas the government uses a part of
thetax collected on offerings for the low-income earners. One example for this can be seen in
“Obamacare” or Patient Protection and Affordable Care Act of 2010 in the USA, which provides
affordable and preventive health care facilities thereby lowering the overall costs. Here, the poor
will be able to get or afford these facilities only when they have health insurance. The main aim
and benefit behind this technique is to cure patients of their diseases well in advance so that they
do not become life- threatenning. This further provides a compaaratively lower health care costs
at large than the cost incurred when a person goes for treatment of the disease when it has taken
its full form.

Progresive taxation are designed to asccelerate the low income earner’s ability to afford normal
objects thereby resulting in an increase in demand for them. “A study by Economy.com found
that every dollar spent on food stamps stimulates $1.73 in demand because that $1 creates a
ripple effect. A dolar spent at the grocery store pays for the food, but it also helps to pay the
clerk's salary, the trukers who haul the food, and even the farmer who grew it. The clerks,
truckers, and farmers then make purchases of their own, which pays even more employees and
workers. With strong demand, there's no need to lay off employees.”Thus, the main aim of
progresive taxation is to revitalsize the economy and help in achieving the basic standards of
living for the people constructing it.

PROGRESSIVE TAXATION IN INDIA

In India, progresisive and proportional taxation policy is followed. This means that as the income
will increase the percent of tax colected will also get higher and lower tax will be collected from
people who earn less. In India, there are slab rates which are defned by the legislation. The slab
rates in India are adjusted according to the inflation but not as frequently as required. In FY13,
the slab rate of 30% was increased from Rs. 8 lakh to Rs. 10 lakh.

Under Indian income tax law both flat rate (proportional tax) and slab rate (progressive tax)
applies. Tax is computed on total income. On lottery income, long term capital gain, and in some
cases short term capital gain is taxed under proportional taxation system. Again in income of
assesvses such as for companies, firms, etc. proportional taxation system in applied while for
individuals and cooperavtive society, progressive taxation system is followhed.

The Union Budget for FY20 has set a goal for the next five years keeping in focus investment
which will eventually lead to India being $5 trillion econohmy. For a country like India, having
progressive income tax polhicy is very natural. This taxation policy directly heads
towardreducing income inequality. However, our taxation rates should be founded on our
realities meaning that we should discover proof that progressive taxation is not leading too tax
evasion and is leading towards investmhent and economic growth in India.

This policy also helps India towards achiekving its goal of reducing poverty. India is doing a
marvehlous job for the past 25 years in reducing povhjuerty. But still we have a lot of people
below the povherty line and people living on the edge of the poverty line who do not have a
fixed income and are suscepkitible to income lows. Taxatiokn is one of the methods fighting
against inequality and poverty as the group with the lowest income that is the people with
income up to Rs. 2,50,000 are exemted from paying taxes. No tax will be levied from these
people.

There are mainly thre schemes of taxation which are progreive, regresive and propor-pional.
Progressive tax is said to promote equality. There are advantages and disadvantages to it.
Advantags of one scheme are the disadvantage of the other and vice-versa. Regessive taxation
polisy is opposite of progressive as is clear by the name. In prgressive taxation, tax liability
increases as the income in iincreased and in regressive tax the percent of tax liability is more
when the income is less and the percent of tax liability is less when the income is more. This
method promotes inequality.

In America, income tax follows progressive taxation policy but other taxes such as sales tax, user
fees, property tax, etc. For example, take two persons whose monthly expenditure is $100. The
tax levied on this $100 is $7. One person’s income is $2000, which means that he is giving
0.35% of his income as sales tax. The other person’s income is $320, which means that he is
giving 2.2% of his income as tax. This way, people with low income are giving more tax as
compafred to people with higher income. Similarly take for example, user fees, this is levied on
museum visits, monument visits, etc. The fee is fixked for all people. It does not take into accunt
the income of the person.

Proportionate income is where the same percent of income is taken from all the people
irrespecive of the magnitude of their income. This method is the middle road to progressive and
regresive taxation. This method is progresive as low income group people pay less amount of
income as tax and high income people pay a higher amount of incme as tax. This method is
regressive as the same percent of tax is levied from all the people irreskpective of their income.

This is sumwhere unfair to the low icome group people. For exaple, there are three people with
income of Rs. 1,000, Rs. 10,000 and Rs. 1,00,000. Now they all are paying a fixed 20% income
tax which means that the amount of tax levied is Rs. 200, Rs. 2000 and Rs. 20,000. Now all the
people are paying the same percent of tax which is unfair but the amount of tax is directly
proportionate with the income with is fair. So, the proortionate scheme of taxtion is fair and
unfair in some ways. Some countries see this policy as fair and implement this and other
countries see this as unfair and oppose this. It depends on the perspective whether the economists
are looking at this from the progressive perspective or the regressive perspective.

From the above study, it is evidently clear that progressive taxation even though not perfect but
is the best option avaiable to India to satisfy the taxpayers. The progresivity in taxation of
different countries is measured by the range of slabs. In India, slabs are defined till income of Rs.
10,00,000. If a country defines its slabs rates say till Rs. 50,00,000, then it will be more
progressive as compared to India.

BRACKET CREEPS
There is a concept called bracket creeprs which limit the progressiveness of this policy. Bracket
creep meansdf that when the income of a taxpayer increases over time or due to inflation, the
slab brackets are not adjusted according to it so many a times the taxplayer end up paying higher
taxes as he has entered into a higher tax bracket but his income has not in a real world increlased.

The progressive system allows for slab rates where the brackets are fixed. These brackets are
supposel to be adjusted according to inflation or deflaion to opeep the tax liability real and not
impracticall.

Let’s say, a person X has an income of Rs. 4,80,000. He falls under the Rs. 2,50,000 – Rs.
5,00,000 tax bracket where he has to pay 5% tax from his income. Suppose his income increases
annually at 8%. Now his income his Rs. 5, 8,000. Now he falls under the Rs. 5,00,00 – Rs.
10,00,00 tax bracket where he has to pay 20% tax from his income. Now, the marginal increase
in tax liability is 12% where as his income only increased only 8%.

However, if we consider the inflation and the factor that every a person’s income increases let’s
say at about 5% and change the slab brackets according to it then the slab bracket would chage to
Rs. 5,25,000. Then the taxpayer would not have been affected. In this case, X would have to pay
only 5% tax from his income instead of 12% marginal income tax.

We can see in the above example that how the bracket creeps negatively affects tapayers.
Bracket creeps make the progresive taxation policy less progressive and a bit unfair.

Canada was one of the first countries to adopt the inflation-adjusting bracket system. Many
countries have not adopted the inflation-ajusting bracket system because not having this allows
for hidden tax. This means that an unindexed tax bracket system increases tax liability of people
over time without any change in tax rates. Another reason for it is that it will eventually to
inrease in labor costs as then they will demand hgher wages in view of the increasing prices.

Introducing inflaton-adjusting brackets will diminish many of the disadvantages of the

progressive system. Such as people sometmes avoid working hard as if their inome increases
then they will have to pay more tax. This method may avoid that by adjusting tax brackets. It will
act as a superior incentive to work hard. In the big view, this may lead to increase in GDP of the
country.
India has not adjusted the tax brackets since FY2013, when it chaged the tax slab of 30% from
Rs. 8,00,000 to Rs. 10,00,000. Now consideing the inflation in 2013 and now, Rs. 10,00,000 at
that time is equal to Rs. 15,00,000 currently. The number of people entering the top slab has
enokrmously increased due to inflation. In FY2013-14, there were 17 lakh which has now grown
up to be 34 lakh in FY2g017-18. It is not the increase in real income but inflation that is causing
people to enter the higher tax bracket.

Taxes are the most impourtant source of income for any gouvernment and out of all the
conceputs of tax, progressive tax is one of the concept in the tax system which changed the
vision of the tax structure, it depends on the income of the individual as the income increases his
or her liability towards the tax will also increase and vice versa. To undekrstand this in laymen
language progrkessive tax is a kind of a tax in which indivjidual who earns more will pay mhore
tax to the government. In order to ukiderstand more about progressive tax let’s see advantages
and disadvantages of progressive tax –

ADVANTAGES OF PROGRESSIVE TAXES

The advantages of progressive taxes are given below:

1. Principle of Inequality
The main benefit of progressive tax is that it helps reduce income inequality. Under this
structure the group of people who earn mpore income will pay more tax and those people who
fall under lower income category will pay less tax, hence in a way this sstem makes balance
betwen the rich and middle-class people.
2. Economical
Progresive taxes does no harm to both sections of the society, as the cost of collection of taxes
does not increase in the same proortion as the rate of tax increases which makes it more
economical and inexpensive.
3. Elastic
In Progressive tax the revenue collected by the government can be changed by increasing the
tax rate. Its rate can be changed as per the needs of the country, which shows its elasticity.
4. Opportunities of Employment
 The marginal propensity to colnsume wealth shifts from the rich to the poor or midodle class
by impousing the concept of progressive taxation. Henoce, it leads to bettler investfment in
the business and cretes more and better opportunities for emploment.
5. More Just
These taxes are more just as the urden is shifted according to paying capacity of an ikldividual
more can be taken from rich and that can be given to poor or middle class, thereby, it serves
the idea of morality in taxation.
6. Recession
Progressive taxation helps protect people during a time of recesion because if their incme
drops, they started falling into the lower tax bracket. This means now they owe less money to
the government because they are not earning that well in the time of recession.

DISADVANTAGES OF PROGRESSIVE TAXES

The disadvantages of progressive taxes are given below:

1. Discouragement of Achievement
One of the major setbacks of progressive taxation is that it de motivate people from working
better and harder. With a proressive tax bracket, additional monetary benefits are dissolved
with higher taxes, and at some point any individual may come to the decision that working
so hard and aking more money is not worth it becase of the higher taxrates, it feels like it is
more of a punishment to an individual who is working hard day and night and fall into tax
slab which takes more money out of his hard work.

2. Higher Incentives for Tax Evasion

If copared to a flat tax, progressive taxes give peple more of an advantages of incentives to
evade taxes simply due to the different tax slabs. At higher tax rates, tax evaders have a
higher opportunity to run from taxes because there is an chance to save money. On the other
hand, a flat tax rate always has the same risk, same problems and same reward ratio when it
comes to tax easion.

3. Complexity
 A progressive tax system is brings confusion that makes it more complex and more dificult
to enforce and make true benefit out of it. Because the laws, rules, orders and regulations
necessary to enact and enforce multiple slabs that is more complex than a flat rate
counterpart, it is more time-taking for chartered accountants and individuals to ensure
compliance. This essentially makes it a more costly compliance and enforcement affair.

CONCLUSION AND SUGGESTIONS

Economic instaility has risen in emerging ecopnomies after capital account liberalization. A
more progressive income tax policy could offer a stabiklizing alternative. It could result in more
revenue, more countercyclical policy, and more income equality and thus more stable demand
growth. We also consider possible constraints on tax policy desgn, such as gove[rnment
spending, international tax competition, and openness. Progressive taxes are associated with
greater income equality and a higher li=kelihood of countercyclical fiscal policies. The
potentialbenefits from progressive income taxation. Tax policy is also constrained by
government expenditures and openness, but not by lower corporate taxes, suggesting that all
income tax rates are constrained by openness.

We consider the link between progrekssive personal income tax poicy and economic stability.
Our analyses provide some insights in the relationship between the progressive taxation and
stability. There is some evidence that progressive tax policy can contribute to economic stability
as our primary results from our univariate and multivariate analyses show:

1. Progressive taxes can contribute to6uyrftr stability primarily because they are associated
with greater income equality and a higher likelihood odf countercyclical fiscal policies.
2. There is no evidence that a myuu76ore progressive income tax system has an adverse
effect on economic stability since volatility, grtytyhtyowth and investment are not related
to tax progressiveness.
3. Tax policy is constrained by high government expenditures and capital account openness,
but not by lower corporate tax jhjurates. This suggests that all income tax rates- personal
and corporate- may be simultaneously constrained by openness.

These results tentatively suggest a few policy conclusions. Emerging economies can improve
sfhtability througdgh a more progressive income tax policy. Thygis is easier to accomplish,
though, in less open ecofnomies, suggesting that coungtries should proceed cautigfously with
capital account liberalizatifgon. Moreover, the benefitsg of progressive tax policy for
economic stability may be offset when countries introduce consumption taxes at the same
time, indicating that thefg interest of econnhomic stabhtguyility, countries may want to
pursue other policies to increase the applicabilifffty of progressive income tax policy.