II. Effects of Taxation on Distribution
Levying of Taxation has both favourable and unfavourable effects on the distribution of income and wealth. To understand the effects of taxation on distribution, the nature of taxation which is adopted in an economy is need to be taken under consideration.
1. Effects of Regressive Taxation on Distribution: Imposition of regressive taxation system will create a gap between rich and poor. Under Regressive Taxation System, rich becomes be richer and poor becomes poorer. The burden of taxation falls more on poor as compared to rich section of society, as the same tax rates will be applicable to all without consideration given to individual income slabs.
2. Effects of Proportional Taxation on Distribution: Under the Proportional Taxation, a uniform rate of taxation is applied on rich and poor. In this case, where the tax rate remains the same, it will create inequalities between them as the tax rate will be same for low, middle and high income classes and that is why they are also called as Flat Tax.
3. Effects of Progressive Taxation on Distribution: Progressive taxation aims to promote equality among individuals. Here, the tax rate progresses as taxable income increases. It means that individuals with low incomes will be taxed at lower rates than individuals with higher incomes.
Economic Effects of Taxation
Taxes are defined as the basic source of revenue for the government and can be described as the money that people are required to pay to the government, and government deploys these inflows in public service and helps the economy move at a pace. It is a burden laid upon the citizens for the income they earn or the assets they hold, tax is not a voluntary contribution to fund public service rather it is an enforced contribution directed by law. Taxation is levied by government bodies to incur common welfare expenses for society and to meet expenses related to Defense, Medical infrastructure, Road connectivity, Education, etc. It is the Indian constitution from which the government derives power to levy and collect taxes. Moreover, taxes can be of two types i.e.
- Direct Taxes: In case when the tax is levied directly on the personal income earned by the person or the personal assets held by the person then such tax is called a direct tax, i.e. where the burden of tax is directly on the person who incurs any earning or profits. Examples are Income Tax, Corporate Tax, etc.
- Indirect Taxes: In cases when the tax levied on the price of goods or services which is consumed by the person. Here, the incidence of tax keeps shifting from one person to another till the goods or service reaches the final consumer. Examples are Goods and Service Tax (GST), Custom Duty, etc.
Table of Content
- Economic Effects of Taxation
- I. Effects of Taxation on Production
- II. Effects of Taxation on Distribution
- III. Other Effects of Taxation