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There are three most common forms of taxation. These include the VAT, Flat Tax, and the Progressive Tax. These forms of taxations are different in terms of how they are imposed. They are also differentiated in terms of their impact on the taxpayers. This study gives the difference between these three forms of taxation under these aspects. The study also seeks to address how these forms of taxation relate and the advantages and disadvantages of each form of taxation.
In an attempt to gather its revenue, government can use various types of tax. These may include Value Added Tax (VAT), Progressive Tax, and Flat Tax. Value Added Tax is the form of tax that is charged on goods and services. This is one of the most common sources of the government revenue. Different commodities may be charged differently through the VAT. The more an individual buys, the more VAT he or she pays to the government. However, the Vat is only applicable for the taxable goods.
On the other hand, Flat Tax is a form of tax where everyone pays same rate despite of their levels of income. In flat tax, people from all levels of income are charged equally. On the other hand, progressive tax is the form of tax where tax rate varies with income. In progressive tax, those who earn high level of income are charged higher than those earning low income. In other words, tax varies with income. Each of these methods has its advantages and disadvantages.
As already noted, VAT tax is a form of tax that is charged on goods and survives. When one buys goods and services, they pay a certain fraction of the value of the commodity as a tax. Some people have argued that the VAT tax is not fair and that it will bear more burdens to one fraction of the society. Christian and Robbins (2009) argued that the majority in the United States of America has feared that the VAT in the country will bear greater burden on the middle.
Since VAT is charged on goods and services, it tends to raise the prices of goods and services. This may have negative impacts on the market. For instance, according to the law of demand, the demand is low when the prices are higher. In this case, the VAT tax may reduce the level of aggregate demand in the country. This may have an adverse impact on the economy.
Despite of these shortcomings, the VAT remains a very useful source of the government revenue. In America, for instance, VAT plays a pivotal role in funding the free government run medical care as well as hospitals both of which provides services to everyone (Anonymous, 2010).
The VAT in the US has also played an important role in funding free education for college students as well as free home mortgages. Without the VAT, such basic services could not be available to the people. In other words, the VAT has contributed to improving the living standards in America.
Flat tax has received an enormous opposition on the ground that it’s oppressive to the poor. This form of taxation is characterized with same tax rate to the people from different income bands. This form of taxation increases the gap between the poor and the rich (Rothbard, 2010). In other words, it does not encourage equality in income distribution.
One of the main advantages of this form of taxation is that it encourages people to work hard since the tax rate is constant. This leads to an increase in the level of production. It also reduces the cases of tax evasion. This helps in maintaining regular tax revenue for the government. This is unlike in the case of the progressive tax which tends to encourage tax evasion.
As already noted, progressive tax, is a form of taxation where people earning more income are taxed heavily than those who earn little. In this case, the progressive tax tends to reduce the gap between the rich and the poor. There have been some disagreements on whether individuals earning higher income should be taxed a higher rate or not. In this form of tax, every income band receives a different tax rate. In some cases, the lowest band of the income may be tax free.
One of the main advantages of this form of taxation is that it is fair. It helps in uplifting the poor in the economy. When the poor are charged little, they can be able to save a greater fraction of their income. Another advantage of this method is that although those in the higher bracket of the income are taxed higher rates, they still ends up taking more home than those in the lower bands.
Therefore, it still encourages those earning higher incomes to improve in their areas. Through this form of taxation, those in the lower band can be tax free (Mitchell, 2009). This is unlike the case of the flat tax where nobody can escape tax. In this case, this form of taxation has a significant role in reducing the level of poverty in a country.
According to Mitchell (2009), progressive tax promotes social cohesion. It can be viewed as a form of tax that is used for the collective good. It has a significant role in reducing the level of disparity. This is unlike the other types of taxation which are associated with high level of disparity. For instance, the flat rate tax has led to a significant level of suffering to the low income earners.
This method has been criticized on the ground that it is inefficient and that it tends to promote evasion, resentment, and reduced incentives to work (Mitchell, 2009). This method tends to lay greater burden on those who work more. This may discourage them.
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From the above discussion, it can clearly be seen that each form of taxation has its own advantages and disadvantages. For instance, progressive tax is good in promoting equality among the people while VAT is ideal as it significantly helps in funding important services like health care. However, each of these methods suffers some limitations.
It is therefore advisable for the government to use these forms of taxation accordingly in order to reduce their negative effects to the taxpayers. For instance, the government may refrain from the taxation of basic goods. This will prevent rising in prices for important commodities like food.
Anonymous. (2010). Wall Street Journal. Europe’s VAT Lessons (Eastern edition). New York, N.Y.: pg. A.22
Christian, E. and Robbins, G. (2009). The Dangers of a Value-Added Tax. Wall Street Journal (Eastern edition). New York, N.Y.: Oct 15, 2009. pg. A.17
Mitchell, D. (2009). VATs Mean Big Government. Wall Street Journal (Eastern edition). New York, N.Y.: pg. A.15
Rothbard, M. (2010). The case against the Flat tax. The free Market Reader; 1988, PP. 342-362