Tax Impact or Incidence may be different individuals. On the basis of incidence of tax on various classes, tax can be classified as Proportional Tax System or Progressive Tax System or Prorated Tax System. The term Proportional Tax System, its merits and demerits are given for your understanding, in the below section.
Proportional Tax System/Proportional Taxation
Under the proportional tax system, the tax is levied on all levels of income at a single uniform rate. It is always in proportion to the income or property. For example, if the rate of tax is 5 percent on income all the persons will have to pay the tax at 5 percent irrespective of the income and therefore, nobody will be spared. There are some merits and demerits of proportional taxation system which are mentioned below-
Merits of Proportional Tax System
(1) It is very easy and simple to calculate. Even a man of ordinary intelligent can calculate his tax liability and understand its implications without any difficulty. It requires no expert and advice.
(2) It does not affect the existing pattern of distribution of income and wealth in the society because all the tax payers will have to pay proportionate tax leaving the balance of income and wealth in the same ratio.
Demerits of Proportional Tax System
The proportional tax is subjected to the following major drawbacks-
(1) It is not based on the principle of equity. The burden of tax falls more heavily on the poorer section of the society. It does not provide any relief to the poor section of the society. It implies that the poorer section will be making greater sacrifice than the richer section. The system therefore, is not just.
(2) Under the proportional tax system, principle of taxable capacity is totally ignored. A poor does not have much capacity whereas rich can pay much more without much sacrifice. The system therefore, contributed less to the public exchequer.
(3) The proportional tax system does not reduce the present inequalities of income and wealth in the society. Rather it continues to maintain status-quo in society. From this point of view also, Proportional Taxation is unjust.
