Proportional Tax: Merits and Demerits

Proportional Tax: Merits and Demerits

A proportionate tax is an income tax system in which everyone, regardless of income, pays the same percentage tax. Low, middle, and high-income taxpayers all face the same proportional tax. Flat taxes are a term that is used to describe proportional taxes. A progressive or marginal tax system, on the other hand, adjusts tax rates as income rises. Tax rates are lower for low-income earners than for high-income ones.

Proportional Taxes as an Example

All taxpayers under a proportionate tax system must pay the same percentage of their income in taxes. If the rate is set at 20%, a taxpayer earning $10,000 will pay $2,000, while a taxpayer making $50,000 will pay $10,000. Similarly, a millionaire would pay $200,000 in taxes. Proponents of proportional taxes argue that they boost the economy by encouraging people to work more because there is no penalty for earning more money. They also believe that a flat tax structure will encourage firms to spend and invest more, resulting in more money flowing into the economy.

Proportional Taxation has a Number of Benefits

The first and most important benefit of proportional tax is that because everyone pays the same rate of tax, there is no ambiguity about the rate of taxation, which leads to clarity in the minds of both taxpayers and tax collectors. When it comes to taxes, the majority of people do not understand the tax rates because there are so many slabs and exemptions associated with those slabs, so having clarity about the rate of taxation makes life easier for taxpayers. Another advantage of proportional tax is that it lowers tax evasion by the wealthy. When tax rates are high for the wealthy and low for the middle and poor, the wealthy will attempt every trick in the book to avoid paying taxes, resulting in reduced tax leakage. Another advantage of proportional tax is that it is easy to grasp for both tax authorities and taxpayers, resulting in improved implementation by tax authorities and acceptance by taxpayers.

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