Question

An indirect tax can be made progressive by imposing higher tax rates on luxuries. Justify the above statement.

Answer 1

The statement that "an indirect tax can be made progressive by imposing higher tax rates on luxuries" can be justified as follows:

1. Indirect taxes, such as sales tax or VAT, are commonly regarded as regressive because they apply the same rate to all individuals, regardless of income.
2. However, this system can be made more progressive by imposing greater taxes on luxury products and services primarily consumed by the wealthy.
3. By raising tax rates on luxuries such as luxury automobiles, jewellery, designer clothes, and high-end equipment, the tax burden is more concentrated among individuals with higher incomes who can afford them.