PROGRESSIVE TAX

tax levied at a rate that increases as the quantity subject to taxation increases. Devised to collect a greater proportion of tax revenue from wealthy people, progressive taxes reflect the ability-to-pay principle. Progression may be introduced through exemptions from tax liability of an initial amount of the tax base, or through progressively greater rates for larger and larger bases. Progressive taxes are a stabilizing force in periods of inflation or recession because the amount of tax revenue changes more than proportionately with the increase or decrease in income. In an inflationary economy, with prices and incomes rising, the actual dollar value of tax credits and allowances remain unchanged. As individual income increases, however, the taxpayer is moved into a higher tax bracket, so that a greater percentage of the income goes toward taxes. During inflationary periods, taxpayers at the lower end of the income scale suffer most under this system. At the same time, the government's tax revenues rise. Working from the basic premise that tax revenues should roughly equal government expenditures, the taxing body must then decide how to spend the increased revenue. This phenomenon greatly strengthens the role of government in the overall economy. By either reducing tax rates or increasing spending, the government can stimulate or restrain private demand. These side effects of inflation on a progressive tax systemshifting the tax burden to the less able and increasing the power of the government to control the economyare contrary to the purpose of the progressive income tax. Tax theorists and economists are divided on how best to deal with this problem. The solution that has been advocated most often is indexation, and several countries adjust their tax rates annually in times of inflation, usually in line with the consumer price index. Those in favour of indexation argue that the increases in effective income tax rates and the resulting growth of the government sector are unintentional and uncontrollable by-products of an inflationary economy. Indexing would help to insure the individual against one of the chief drawbacks of inflation and return a certain amount of economic initiative to the private sector. The argument against indexing is twofold. First, indexing would eliminate the desirable stabilizing effects of progressive taxation during periods of inflation. Second, indexing has not been designed to work effectively in periods of recession.