Taxation & Inequality
" A fine is a tax for doing something wrong. A tax is a fine for doing something right. "
Taxes are mandatory payments imposed on individuals or any given organization by the government. Purpose of taxing - In simple terms, it’s just to run the region/nation by the government. The collected amount under tax is in turn used as a fund by the government in order to expenditure in the field of research & development, defence and in many more sectors but, at the same time focussing on the betterment of the people/society.
There are generally 3 categories of the tax systems, they are:
-> Regressive
-> Proportional
-> Progressive
Regressive Tax - This type of tax impacts the lower income people more compared to the higher income people such that lower income people pay higher amount of taxes compared to the high income people. Sales Tax, Property Tax are some of the real time examples, Paying GST on groceries or any other products would be the same irrespective of the buyer’s income, such that the tax paid on a particular product eats up a higher portion of the low earners paycheck than the high earners.
Proportional Tax - It’s also known as “Flat Tax”, where irrespective of the income, there would be a fixed rate of tax percentage to be paid. For example, If the flat tax is fixed at 10%, person A earns a paycheck of $100K / Year pays $10K in terms of tax, whereas person B earns a paycheck of $50K/Year pays $5K in terms of tax. Until the end of the year 2020, Russia has been the largest nation in the world to follow the Flat Tax system fixed at 13% per annum.
Progressive Tax - Practice of levying lower tax rates on the low earners whereas levying higher tax rates on the high earners. Concept of tax brackets is imposed such that taxation increases as the income increases.
For example, In an imaginative democratic region, progressive tax system is followed with defined tax brackets. Progressive Taxation for given income is as follows: 0% up to $10K, 10% from $10,001 to $20,000 and 20% for above $20,001. If person ’A’ earns $50,000 per annum, the amount in terms of tax they are imposed to pay is as follows: ((10,000*0)+(9,999*0.10)+($30,001*0.20)) = 6,999.2
On average, the given person is paying almost 14% of their income in terms of tax.
Following the same tax brackets, if another person ‘B’ earns around $15K per annum. The amount in terms of tax they are imposed to pay is as follows: ((10,000*0)+(5,000*0.10)) = $500
On average, the given person is paying 3.3% of their income in terms of tax.
Clearly we can see that less tax burden is imposed on the less income people whereas more tax burden is being barred by the people who earn more. In contrast, it is somehow trying to discourage people from earning more at least it somehow tries to punish the rich. But it’s not true that progressive tax actually makes the lower income people pay less tax to the government and richer people to pay more! Progressive taxation is mainly focussed in terms of direct tax but not when it comes to indirect taxation! According to the study made by VOX, the majority of the taxes being collected from the middle and the poor class in terms of the payroll (Kind of tax which is deducted from the employee’s income by the employer which in turn is paid to the government.) and the consumption taxes (Taxing on the goods or the services, quality of the products generally consumed by the poor is low such that the lifetime of the product could in turn be less compared to what the rich buys. So, there’s a probability that poor - middle categorical people often buy more compared to the rich and hence more tax revenue.) .
#taxtherich
For many rich and super rich categorical people, higher rate of taxing never affects or impacts them much as many of them own the valuation in terms of so called “shares” of their company or other company. Basically, the nature of tax on the shares is tax deferred which simply means, can’t be taxed until or unless someone sells their shares. Another advantage is, Owner of the company can possibly even pledge (act of taking loan against the shares) shares in order to get cash. Recently, Elon Musk too pledged some portions of his Tesla shares in order to arrange some part of the money to buy Twitter.
Most of the rich avoid taxation by following the Stepped Up Basis ! When assets of the deceased person are transferred to the beneficiary, the act of not taxing those previously valued assets but taxing the valuation of assets thereafter in case the present beneficiary sells. So, there’s a widening gap, the rich get richer, the poor get poorer and it doesn’t stop anywhere with respect to the time. U.S Senator - Warren Elizabeth come up with a common viewpoint stating their idea of implementing the so called Wealth Tax (even the French Economist - Thomas Piketty pushing the idea of progressive wealth tax ), unlike income tax where a certain percentage of tax rate would need to be paid, Over the wealth tax, certain tax rate would be charged annually based on the assets which respective person own, say stocks, bonds (even if they are tax deferred !), yachts, villas, paintings, jewellery and other valuable items. Some people believe implementing such a taxing structure could somewhat try to limit the potential of the rich becoming richer (trying to build a top ceiling from further growth according to Joseph Stiglitz, Thomas Piketty.) but other economists like Angus Deaton believed that someway or other people will try to dodge it.
Conclusion:
Motto for regularizing the tax in any given region was in order to have liquidity funds from time to time for the government such that they could able to use this fund in order for the betterment of the given society but as the time passed, it turns out that there’s widening the gap of inequality status of the people for the given region. Simply taxing the rich with higher tax percentage doesn’t seem to work due to the nature of how they hold their worth in shares/equities such that they are tax deferred. Impact of the proposals like the wealth tax won’t be known until they are implemented and understanding how they could affect economic inequality.
References & Sources:
- https://www.vox.com/videos/2019/12/20/21028676/tax-poor-rich-data-video
- https://www.ft.com/video/b5b059c3-b24e-4f15-8071-2b2424483b9b
- https://www.cnbc.com/2020/09/17/economists-stiglitz-and-piketty-us-needs-a-wealth-tax.html
- https://www.businessinsider.in/policy/economy/news/a-nobel-prize-winning-economist-says-we-shouldnt-tax-the-wealthy-because-theyd-find-a-way-to-dodge-it/articleshow/82036120.cms