Explain the difference between progressive direct tax and regressive indirect tax and consider which tax system is more effective in reducing income inequality. [8]
A progressive direct tax, is a tax system where tax rate increases as income of the individual or firm increases. As a result, those in a higher income bracket will contribute a bigger portion of their revenue as tax. The progressive direct tax can be efficient in reducing income equality by providing more resources for public services that can benefit those with lower income. Although this tax is considered fair, the higher tax rate may lead to tax evasion and avoidance which can reduce the revenue generated by it.
As for indirect regressive tax, the tax rate decreases as the income of an individual or firm increases. Thus those with lower incomes pay a larger percentage of their income as tax. One of the biggest advantages of this type of tax is its simplicity. Unlike direct progressive tax, it does not require complex record keeping and calculations. However, this tax is unfair as lower income households are forced to pay a larger share of their incoma as tax.
In conclusion, both progressive direct tax and regressive indirect tax systems have their advantages and disadvantages. When it comes to reducing income inequality, the progressive direct tax is generally more effective since the tax system places more burden on those who are able to afford it. Whereas indirect regressive tax system burdens the lower income more and it may not be affordable to them.
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