Accordian Tax

Context

An article published in Love Mint.

Accordian Tax

The term “accordion tax” refers to a progressive taxation system designed to:

• Redistribute income from the wealthy to the poor, aiming to reduce income inequality.
• Maintain incentives for innovation and entrepreneurship.

Here’s how it works:

• Similar to an accordion expanding and contracting, the tax system applies higher tax rates to higher income earners.
• As income increases, the tax rate gradually increases along with it, taking a larger portion of the income as a tax.

Purpose and Arguments:

• Proponents argue it promotes social justice by addressing wealth disparity.
• By keeping some after-tax income higher for high earners, it aims to encourage them to continue taking risks and investing, potentially leading to economic growth.

The term “accordion tax” isn’t widely used in official tax systems. However, the concept of progressive taxation is implemented in many countries, including India, where tax rates increase with income levels.