Fiscal Policy and Taxation – 02
Taxation is a term for when a taxing authority, usually a government, levies or imposes a tax. The term “taxation” applies to all types of involuntary levies, from income to capital gains to estate taxes.
- Taxation occurs when a government or other authority requires that a fee be paid by citizens and corporations, to that authority.
- The fee is involuntary, and as opposed to other payments, not linked to any specific services that have been or will be provided.
- Tax occurs on physical assets, including property and transactions, such as a sale of stock, or a home.
- Types of taxes include income, corporate, capital gains, property, inheritance, and sales.
Proportional, progressive, and regressive taxes
Taxes can be distinguished by the effect they have on the distribution of income and wealth. A proportional tax is one that imposes the same relative burden on all taxpayers—i.e., where tax liability and income grow in equal proportion. A progressive tax is characterized by a more than proportional rise in the tax liability relative to the increase in income, and a regressive tax is characterized by a less than proportional rise in the relative burden. Thus, progressive taxes are seen as reducing inequalities in income distribution, whereas regressive taxes can have the effect of increasing these inequalities. The taxes that are generally considered progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, may become less so in the upper-income categories—especially if a taxpayer is allowed to reduce his tax base by declaring deductions or by excluding certain income components from his taxable income. Proportional tax rates that are applied to lower-income categories will also be more progressive if personal exemptions are declared.
Income measured over the course of a given year does not necessarily provide the best measure of taxpaying ability. For example, transitory increases in income may be saved, and during temporary declines in income a taxpayer may choose to finance consumption by reducing savings. Thus, if taxation is compared with “permanent income,” it will be less regressive (or more progressive) than if it is compared with annual income. Sales taxes and excises (except those on luxuries) tend to be regressive, because the share of personal income consumed or spent on a specific good declines as the level of personal income rises. Poll taxes (also known as head taxes), levied as a fixed amount per capita, obviously are regressive.
It is difficult to classify corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of uncertainty about the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of determining who bears the tax burden depends crucially on whether a national or a subnational (that is, provincial or state) tax is being considered Characteristics of Taxation
Taxes can be categorized as (i) Regressive (ii) Proportional (iii) Progressive (i) Regressive Tax It is a tax under which the income of a person goes up, the rate of tax goes down so that the tax burden on higher incomes is relatively lower. Eg: indirect tax such as sales tax, service tax (as rich and poor pay the same tax for purchasing everyday products and services) (ii) Proportional Tax It is a tax under which as the income of a person increases (or) decreases, the rate of tax is same for all income groups. So that tax burden for an income groups is same E.g. : Income slab: 2.5 – 5 Lakh – 5% 5 – 10 Lakh – 5% 10 Lakh above – 5% (iii) Progressive Tax It means as the income of a person goes up, the rate of tax imposed on his income goes up so that the tax is more for higher incomes. It reduces inequalities and statistics “Principle of equality in taxes”. For eg.: Salary 2.5- 5 Lakh – 5% 5 – 10 Lakh – 10% Above 10 Lakh – 20% Incidence of tax vs impact of tax The point where the tax looks as being imposed is known as the incidence of tax- the event of tax imposition. The point where the tax makes an effect is known as impact of tax – the after effect of tax imposition. This distinction can be seen in the type of taxes such as direct tax and indirect tax.
Different types of Taxation:
- i) Direct & Indirect taxes
- ii) Specific & Advalorem taxes
If impact and incidence of the tax lies on the same person. A direct tax is paid directly by an individual or organization to the imposing entity. Direct taxes are progressive in nature in India. E.g.: Income Tax, Corporate Tax, Property tax & wealth tax, etc. Indirect Tax An Indirect tax is a tax which is imposed on someone but is paid by someone else. E.g. excise duty – levied on producer, but ultimately paid by consumer along with price. It means burden falls on someone else (or) its burden can be shifted E.g. : Taxes on goods & Services (GST) like VAT, service Tax, Entertainment tax Excise duty.
- ii) Specific & Advalorem taxes
- Specific Tax