a tr t re in ndia 17.3
Progressive tAxAtion rate of taxes point of view. Such taxes have fixed
rates for every level of income or production, they
This method has increasing rates of tax for
are neutral from the poor or rich point view or
increasing value or volume on which the tax is being
from the point of view of the levels of production.9
imposed.7 Indian income tax is a typical example
Usually, this is not used by the economies as an
of it. The idea here is less tax on the people who
independent method of taxation. Generally,
earn less and higher tax on the people who earn
this mode is used as a complementary method
more—classifying income earners into different
with either progressive or regressive taxation.
slabs. This method is believed to discourage
If not converted into proportional taxes, every
more earnings by the individual to support low
progressive tax will go on increasing and similarly
growth and development unintentionally. Being
every regressive tax will decrease to zero, becoming
poor is rewarded while richness is punished.
completely a futile tax methods. That is why every
Tax payers also start evading tax by showing tax, be it progressive or regressive in nature, must
lower unreal income. But from different angles be converted into proportional taxes after a certain
this tax is pro-poor and taxes people according level.
to their affordability/sustainability. This is the
most popular taxation method in the world and
a Good Tax sysTeM
a populist one, too.
What are the characteristics of a good tax system?
regressive tAxAtion There has always been a debate among economists
This is just opposite to the progressive method having and policymakers on the issue of design of the
decreasing rates of tax for increasing value or volume tax system. Taxation in developing economies
on which the tax is being imposed.8 There are not has been even more debated as the trade-off
any permanent or specific sectors for such taxes. As assessment generates enough controversy. Main
a provision of promotion, some sectors might be debatable issues in the design of a tax system
imposed with regressive taxes. As for example, to are whether progressive or regressive taxation,
promote the growth and development of small scale direct tax or indirect tax collections should be
industries, India at one time had regressive excise higher, whether revenue deficit is better, etc. The
duty on their productions—with increasing slabs of controversies set apart, there is a broad consensus
volume they produced, the burden of tax used to go on five principles10 of a good tax system, among
on decreasing. economists and the policymakers:
This method while appreciated for rewarding the
higher producers or income-earners, is criticised for
being more taxing on the poor and low-producers. Though fairness (i.e., the first criteria of a good tax
This is not a popular mode of taxation and not as per system) is not always easy to define, economists
the spirit of modern democracies. suggest inclusion of two elements in the tax
system to make it fair namely, horizontal equity
ProPortionAl tAxAtion and vertical equity. Individuals in identical or
In such a taxation method, there is neither similar situations paying identical or similar taxes
progression nor regression from the point of view 9. Samuelson and Nordhaus, Economics, p. 329.
10. Stiglitz and Walsh, Economics, p. 382. A comprehensive
7. Samuelson and Nordhaus Economics, 329; Stiglitz and analysis of good tax structure is also given in Meade
Walsh, Economics, p. 380. Committe Report, Institute for Fiscal Studies (IFS),
8. Ibid. Washington DC, 1978.