![]() A progressive tax indeed places a disproportional higher tax burden on high income earners but due to the decreasing marginal utility of income this does not necessarily lead to a comparable higher sacrifice of utility. ![]() Moreover this redistribution seems also to be justified considering the decreasing marginal utility of income. A progressive tax is characterised by rising marginal and average rates of taxation, which in contrast to a proportional tax emphasizes more strongly the effect that the relative tax burden increases with rising income.Īs a progressive tax system places a higher tax burden on earners of a high income, it is often considered to be more just and fair than a proportional tax system as it achieves redistribution from wealthy people to the poor in a society. As the following figure shows the marginal rates of taxation stay the same however the average tax rate increases with rising income due to the more and more negligible effect of the tax exemption.Įspecially with respect to income tax the flat rate tax system is often contrasted with a progressive tax rate system. With respect to income taxation, it usually comprises a tax exemption for income below a certain level. ![]() A flat rate tax is a system with a constant tax rate this means that each tax payer has to deduct the same proportional amount of his income and earnings subject to taxation to the fiscal office. 1 Furthermore in other European countries like Germany and Switzerland there are controversial discussions about introducing a flat rate tax system. Some European countries, especially in Eastern Europe, for example the Czech Republic and Slovakia, recently introduced a ‘flat tax’ system.
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