A progressive income tax always raise more revenue than a proportional income tax. Do you agree or disagree?
I do not agree with this for at least two reasons:
- The proportional tax could be set at a much higher rate and would therefore (presumably) bring in more revenue. In other words, a progressive system with a top rate of 25% might well bring in less than a proportional system with a top rate of 40%.
- Even if the proportional rate were lower, there is the conservative argument that says that lower tax rates bring in more revenue (often called the Laffer Curve). This argues that a lower rate encourages people to work more (especially at the higher income levels where progressive systems "bite" hardest). Therefore, proportional tax = more hours worked = more pay = more tax revenue.
It is not necessary that a progressive income tax always results in greater total revenue than a uniform proportional tax. The total revenue is dependent on several factors including the basic rates of tax. Uniform rate of tax can be very low or very high. Also the the difference in tax rates applicable at low and high levels in a progressive tax system may be small big. total revenue collected will be very much depend on the exact tax rates applicable.
The total revenue is also affected by the total income earned, and the distribution of income according to high or low income categories. The tax rates applicable influence the motivation of people to earn more money. A progressive income tax rate that is too high may discourage people from undertaking many types of business activities, where the profit margin is low or the risks are high. This may result reducing the total income over which the tax is collected at a rate that is higher than the rate of increase of tax rate. This will result in reduction of total revenue with increasing tax rates.
Finally, higher tax rates encourage people to adopt legal and not so legal means of avoiding tax. This again tends to reduce the the total base of income over which the tax is collected. This may also cause the revenue to fall as the rates of taxes increase.
In summary we can say that the absolute rates of taxes as well as the difference in rates of taxes for different levels of income do not bear a direct relationship with the total tax revenue. Governments need to pay careful attention to the effect of income tax rate on motivation of people in engaging in different types of business and in income tax avoidance practices to arrive at optimum tax rates.