Introduction
Tax forms one of the major sources of government revenue; it contributes to economic growth and development as well as the overall prosperity of a country. Based on the method of collection, a tax system can be flat, regressive or progressive. The progressive tax system entails increasing taxes with an increase in individual or household income. The regressive system involves decreasing tax as income increases while the flat tax is a system where everyone pays the same tax irrespective of the income (Roach, 2003). The tax system adopted in a country depends on set objectives, its impacts on taxpayers, and the desired effects on the performance of the economy. Progressive tax results in higher revenues because people with higher income are taxed at a higher tax rate generating higher tax revenue.
A. Current Problem: Comparing revenue generation among countries using progressive and flat tax systems.
B. Area of Focus: Countries with progressive and flat tax system
C. Key Terms: progressive tax, flat tax
Thesis Statement: Progressive tax results in higher revenues because people with higher income are taxed at a higher tax rate generating higher tax revenue. However, a tax is a disincentive to work (Meade, 2013, p.38).Therefore, it will result in less income on aggregate. If the assumption holds, higher tax revenue will be generated relative to a flat tax regime.
2. Literature Review
A. Historical overview of countries with progressive tax system: Progressive tax system is widely used in most countries, and it leads to increased workers efficiency, greater economic performance, and higher total revenue (Blum and Kalven, 1979). It leads to lowering of financial inequalities, creating more social benefits, thereby creating a large tax paying society (Farhi and Werning, 2010).
B. Historical Overview of Countries with Flat Tax System: Flat tax system promoted equality, motivation to work and higher levels of economic independence (Neubauer, 2013, p.7). Hall stated that a flat tax system experienced from a transparent tax system that ensures taxing of all income and utilizes uniform rate is more efficient (2007).
C. Current Link between Progressive Tax System and Flat Tax System: Essentially, the two taxation systems constitute the major sources of government revenue nearly in all countries of the world (Shapiro, 1996).
D. Gaps in the Research: Little information is available for use in determining the best system of taxation that will simultaneously enhance achievement of goals of the country and individuals.
3. Argument 1. Progressive tax promotes reallocation of resources.
A. Minor point 1. Progressive taxes ensure that tax burden is shared in society in an equitable way by taking more from higher- income and redistributing them through the provision of public goods by the government (Mehrotra, 2013).
B. Minor point 2. The government spending on basic facilities such as education and health care create employment, thus adding more to the tax payers (Holbrook, 2013).
C. Minor point 3. The federal government uses a progressive tax system to ensure that levying of tax is proportional to individuals’ income that dictates the ability to pay thereby promoting redistribution of resources (Diamond and Saez, 2011).
4. Argument 2. Progressive tax enhances balanced economic growth.
A. Minor point 1. Progressive tax is found to yield more revenue if the collected revenue is used to balance the market sides of the economy. If a less progressive tax comes from the supply side of the market, investments, which stimulate the economy, will be promoted. As a result, economic growth will occur resulting in more tax revenue (McCullough, 2007).
B. Minor point 2. Citizens with lower incomes are supported by those with higher incomes under progressive tax regime because the system progressively reduces the tax burden, reducing the tax effects on low-income earners (Pigou, 2008).Thus, it enables them to increase their savings, resulting in increased investments and eventually more tax revenue. Besides, helps in raising the living standards of the majority and, therefore, generates more revenue by increasing demand for both consumer goods and luxuries (Smith & Cannan, 1977).
5. Counter-argument 1: Progressive tax system is less efficient in promoting economic growth hence less efficient in revenue collection.
Refutation: Economic efficiency is compromised by the changes in both behavior and equilibrium prices due to taxation. Consumers tend to consume a smaller amount of the product, causing firms to produce a lesser amount and buy fewer inputs (Fullerton and Metcalf, 2002).
Workers productivity under progressive tax regime will increase less proportionately compared to productivity under the flat tax regime. Employers only employ a worker if the cost incurred is less than the value to the production by that worker (Krugman, 2001, p. 43). For example the federal government advocates for the adoption of a flat tax system to ensure economic growth stimulation by reducing unemployment and hyperinflation experienced during progressive tax regime (Schadewald and Misey, 2015).
6. Counter-argument 2: flat tax system is best in promoting equality and enhancing motivation to work.
Refutation: To avoid unfair treatment to economic agents, a fair tax system that will simultaneously stimulate growth and balance the economy is necessary. Jorgensen (2003) observed that United States economy could reform during an economic depression by adopting a flat tax system. He estimated that a flat tax could result in the generation of a wealth of almost five trillion U.S dollars, which could serve in creating additional revenue for the government. A flat tax system is more equitable than progressive (Viard and Carroll, 2012). Raising tax will reduce the purchasing power of consumers by lowering their disposable income (Kaplow, 2010). For example, the wealthiest one percent of Americans earns more than the poorest forty percent put together (Wenz 2012, pp 228). Thus, the wealthiest Americans have become much richer while nearly everyone becomes squeezed (Tax Fundamentals, 2011). Furthermore, progressive taxation is not equitable since it comes from a combination of work effort and aptitude (Stabile, 1998). Persons with low-value aptitudes earn less than persons with high-value aptitudes (Edwin, 1908). Additionally, high progressive tax discourages capital investment on consumer goods as people with high incomes turn to equity investments (Jorgenson and Yun, 2001).
Conclusion
Progressive tax system remains the most widely used in most countries for government revenue collection. To promote efficiency, equality, workers productivity, and overall economic growth, countries need to adopt new tax systems and incorporate them in their taxation systems. Sufficient information should be collected and used in determining the best tax system to use.
Bibliography
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