Progressive tax is defined as tax that removes a greater % of income as income rises. Indirect tax taxes expenditure.
The tax paid over income graph for progressive tax shows a line that curves up. For each equal increment increase in income, tax paid becomes much larger.
Under progressive taxes, the wealthy pay more. For increasing equal intervals of income, tax increases at a constant rate from T1 to T2 since that part of the graph appears to be straight.
However, for increasing equal intervals of income, tax increases at a greater rate from T2 to T3; this part of the graph is curved upward. The distance between T3 and T2 is greater than the nearly equal distances between T1 and 0 , T1 and T2. As somebody gets richer, the change in tax over change in income (or rate) increases.
Regressive tax is the opposite. For each equal increment decrease in income, the rate of taxation increases. Less wealthy people pay more. Proportional tax is the middle way. For each equal increment increase in income, the rate of taxation remains constant. Poor and rich alike pay the same percent of their income.
In Jakarta, the government implemented a progressive car tax. Purchases of first cars are taxed 1.5%. Subsequent cars are taxed 2-4 %. This tax is indirect because it is taxing expenditure, not income.
On one hand, the progressive tax has successfully raised more government revenue. According to the article, the progressive car tax resulted in a “16% increase from last year’s vehicle ownership tax revenue”. In addition, 10% of the revenue will go to infrastructure projects and development of public transportation. Such spending would boost the economy. Increased development of public transportation in particular may ease traffic congestion and make it easier for people who cannot afford cars to travel. However, according to transportation expert Trisbiantara, the Jakarta government has not yet significantly improved the public transportation system.
Making tax rates for the first car lowest especially benefits lower income people, who will most likely not buy additional cars. People who buy more cars are more likely to have higher incomes so richer people pay more car tax. Revenue from wealthier car owners can also be redistributed to people on welfare; progressive tax is more humane.
On the other hand, the progressive tax may discourage wealthier people from spending more on cars because additional cars would come with a higher tax rate. Lower car spending could then reduce the profits of the car industry. But according to Trisbiantara, public transport is so crowded that car owners have no choice but to drive cars. Thus, implementation of the public tax probably hasn’t deterred people from buying more cars. Until the government actually fixes the public transportation system, the car industry does not have to worry about falling profits.
Although the government’s decision to leave public transportation spending as an afterthought does not hurt car businesses, it could make life harder for people who can only afford public transportation. Overly crowded public transport could result in some people not being able to get a ride. Also, congestion would worsen. According to the article, “more than 1,500 new motorcycles and more than 500 new cars enter the city’s streets every day.” With this many new vehicles coming into Jakarta, it would be wise to expand public transportation to lessen the worsening traffic congestion.
Not alleviating the congestion would lead to several consequences. First, the number of traffic accidents may increase. Second, transportation of goods could slow down. This could decrease Jakarta’s economic efficiency and its competiveness. Third, increased congestion increases pollution. More pollution would harm the environment and increase the rates of respiratory diseases. Decreased health decreases quality of life and reduces the productivity of the economy.
Implementation of the progressive car tax system has increased the government’s tax revenue. Having higher rates of tax for additional cars ensures that wealthier people pay more taxes. This makes the system fairer. Nevertheless, the government really must spend the tax revenue on improving the public transport system. The consequences of not doing so would be costly.
!?!?!?! x 10000 