Death and taxes are always quoted as the two sure things in life. Another sure thing is the great debate over what types of taxes are the most cost effective and lead to the highest levels of prosperity for most people. Although we may never quite solve this age-old question, we can look at some of the disadvantages of one of the main taxation mechanisms around: the progressive tax.
Discouragement of Achievement
One of the major downsides of progressive taxation is that it inherently discourages people from working harder and becoming more successful. With a progressive tax bracket, additional monetary benefits are diluted with higher taxes, and at some point people may come to the decision that making more money is not worthwhile because of the higher tax rates.
Higher Incentives for Tax Evasion
In comparison to a flat tax, progressive taxes give people more of an incentive to evade taxes simply due to the different tax brackets. At higher tax rates, tax evaders have a higher propensity to evade taxes because there is an opportunity to save money. On the other hand, a flat tax rate always has the same risk and reward ratio when it comes to tax evasion.
A progressive tax system is inherently more complex and more difficult to administer and enforce. Because the laws and regulations necessary to enact and enforce multiple brackets have to be more complex than a flat rate counterpart, it is more time-consuming for accountants and individuals to ensure compliance. This essentially leads to a more costly compliance and enforcement.
- dollar sign image by Alexander Zhiltsov from Fotolia.com