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Question
An indirect tax can be made progressive by imposing higher tax rates on luxuries. Justify the above statement.
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Solution
The statement that "an indirect tax can be made progressive by imposing higher tax rates on luxuries" can be justified as follows:
- 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.
- However, this system can be made more progressive by imposing greater taxes on luxury products and services primarily consumed by the wealthy.
- 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.
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