Eric Kagoi

 Income Tax System Student Name Tutor Course Institution Date Income tax system Introduction Tax is a compulsory payment by a tax payer to the state through the revenue authority without involving a direct repayment of goods and services in return. Income tax is a type of tax that is imposed on taxpayer that have different types of incomes or profits. It is through taxation that the government is able to generate its revenue which it later uses to provide services back to its people. (Mirrlees,.1971). Brandman is a new state that has been formed and it needs to have its own tax system rather than using the same as the United states. The importance of a tax system is that it helps to have a well-structured system that is able to collect revenue for the government without being biased. There are different types of tax system that can be used and they all have their merits and demerits too. The new state of Brandman will employ the use of progressive income tax as its income tax structure. Progressive tax system is where the relevant authority imposes high tax rates on taxpayers whose income increases. This is to mean that people who earn more pay more taxes than those who earn less. This is the opposite of the regressive tax system which takes larger percentage of income from the low-income earners than it does from the higher income earners. It tends not to bring growth and development as opposed to the progressive tax which is mostly used by most of the states in order to create more revenue. (Diamond, & Saez,2011). Modern economies have adopted the progressive tax system because it has the following the advantages: first is because the progressive tax is equitable whereby the rich pay more taxes than the poor because they have the ability to pay more, it also tends to reduce the unfair distribution of income and wealth since it’s based on the principle of ability to pay. Thirdly, it is a productive system as it yields more revenue than the other tax system. Fourthly is that it is economical in the sense that the cost of collection is lower than the revenue realized. It is also elastic where the tax rate changes with the increase or decrease of income of the tax payers. (Kakwani, 1977) With all said this type of system also has it flaws whereby it is viewed as the killer of hard work whereby the tax payers will opt not to work hard since they will be required to pay more of the profits they realize thus punishes hard work and disincentives people from earning more. Secondly the progressive tax system tends to go against the benefit principle of taxation which states that those who benefit largely from the government should be paying high taxes of which is the contrary since the poor do not pay high taxes and they are the biggest beneficiaries. The progressive tax also tends not to be good for it encourages tax evasion from the high-income earners through making false declarations of what they earn from their businesses. The progressive tax system can be evaluated through the following criteria: Sufficiency This involves the determining the aggregate size of the tax revenues that must be collected and making sure that the system delivers to its expectations. This is surely the prayer and wish of every revenue authority to be able to meet the required threshold of revenue generation. With the progressive tax system sufficiency is catered where it is able to deliver the revenue needed by highly taxing the high-income earners in order to be to fill up the gap made from the low-income earners who pay less taxes. Static and Dynamic Forecasting Static forecasting assumes that no change will occur in economic activities as a result of changes in tax policy while dynamic forecasting assumes that a change in the tax policy will impact a change on the taxpayers which will be clearly reflected in economic growth and development. According to progressive tax static forecasting will at a disadvantage because even when the income reduces, the tax rate reduces still no economic change will be felt unlike the dynamic analysis which shows the progressive tax to be at an advantage because as the income increases the tax rate also increase as it will be felt in the economic growth. Income and Substitution Effects This is where in the income effect, as the tax rate go up people will tend to work hard in order to earn more and indemnify with the loss of money through taxes. This is however a disadvantage in the progressive tax because as the income increases the tax rate also increases thus making it even worse because one will be required to pay more. With the substitution effect, as the tax rate goes up people will tend to substitute with activities that are not taxable in order to avoid paying huge taxes. With progressive tax system, it can help with substitution effect because it is flexibles and changes when the income reduces. Equity This is where the tax system is considered to be fair when it is imposing the tax according to the ability of the tax payer. This is best possible way of having a progressive tax system as it ensures there is equity at all cost whereby the poor pay low taxes unlike the rich people who pay huge taxes due to their ability to pay. It ensures there is proper distribution and there is no discrimination or favors for you pay according to how you earn. Horizontal and Vertical Equity In horizontal equity, it implies that taxpayers in the same level or situation pay the same amount of taxes while in vertical equity, taxpayers who are high income earners pay more taxes than those who are low income earners. This is the true model of a progressive tax system for it only impose taxes considering the taxpayers’ ability to pay and those who are in the same position pay the same amount with no favors. Certainty In this kind of evaluation, tax payers are able to know the exact amount of taxes they are required to pay, when they are required to pay and where to pay it. Progressive system is advantageous because the tax payer is able to know how much he/she should pay and paying in excess whereby the low-income earners are able to know that they cannot pay the same amount of tax as the high-income earners. Convenience In this evaluation, the tax system is required to be design in a way that it can collect tax without the tax payer experiencing difficulties. The system is required to be easy to use and understand whereby there are no complications such that tax payers may even start to have zero confidence in it. The progressive tax has portrayed that where tax payers are able to know their category thus there will be no undue hardships to the tax payer. Economy The tax system should be able to minimize all its cost associated with the revenue collection. The revenue collected should be high than the cost used to collect the tax. The progressive tax is economical and efficient and this is well seen through the amount of revenue collected. It is able to maximize all the tax paying points and no tax payer is left out regardless of the ability to pay. Conclusion A good tax system should create in order to meet the needs the of revenue authority without at the same time exploiting the tax payers who struggle to pay their taxes. Most people view taxation as a punishment because it reduces their income but when citizens put in their right attitude, tax collection will be able to transform the country through economic growth and development. Progressive tax is regarded as an engine of social improvement because it reduces the gap between the rich and the poor in the society. Progressive tax system is best for any country to use in its revenue collection agenda. References Alm, J., Wallace, S., & Park, S. M. (2006). Can Developing Countries Impose an Individual Income Tax?. The challenges of tax reform in a global economy, 221-248. Diamond, P., & Saez, E. (2011). The case for a progressive tax: from basic research to policy recommendations. The Journal of Economic Perspectives, 25(4), 165-190. Harberger, A. C. (1962). The incidence of the corporation income tax. Journal of Political economy, 70(3), 215-240. Kakwani, N. C. (1977). Measurement of tax progressivity: an international comparison. The Economic Journal, 87(345), 71-80. Mirrlees, J. A. (1971). An exploration in the theory of optimum income taxation. The review of economic studies, 38(2), 175-208. Piketty, T., & Saez, E. (2007). How progressive is the US federal tax system? A historical and international perspective. The Journal of Economic Perspectives, 21(1), 3-24.