Apportioning the Tax BurdenThis is a featured page

Benefits Received versus Ability to Pay- the two basic philosophies on how the economy's tax burden should be apportioned

Benefits-Received Principle
    • Those who benefit most from government-supplied goods or services should pay the taxes necessary to finance them.
    • ex: paying toll to drive on the highway
    • Logically, this principle can not be applied to income redistribution programs, as it would be ridiculous to tax poor families to finance their welfare payments.

    Ability-to-Pay Principle
    • Tax burden should be apportioned according to taxpayers' income and wealth: basically, taxpayers should be taxed fairly, in that they are able to pay without losing their income (i.e. people with larger incomes should pay more taxes absolute and relative than those with smaller incomes).
    • A dollar taken through taxes from a poor person who has few dollars represents a greater utility sacrifice than a dollar taken through taxes from a rich person who has many dollars.
    Progressive, Proportional, and Regressive Taxes

    Progressive taxes
    • Average tax rate increases as income increases (impacts more heavily on high incomes) people earning more money pay a greater percentage of their income.
    • Such a tax claims not only a larger absolute (dollar) amount but also a larger percentage of income as income increases
      • ex. graduated income tax: if you earn $0-25000 you may pay 0% in taxes, if you earn $25000-30000 you may pay 10% in taxes, $35000-50000- 15%, etc...
    Proportional taxes
    • Average rate of tax remains the same regardless of the size of income, a flat tax rate.
      • ex. Corporate Income Tax: ALL firms pay 20% of its income as tax, regardless of their incomes.
    Regressive taxes
    • Average rate of tax declines as income increases (impacts more heavily on low incomes).
    • Such a tax takes a smaller proportion of income as income increases. It may or may not take a larger absolute amount of income as income increases.
      • ex. sales tax, payroll tax, property tax
      • ex. you pay 15% if you earn less than $10,000; 10% if you earn $10,000 to $20,000; 5% if you earn $20,000 to $30,000; and so forth.

    		income avg tax rate
    proportional - constant
    progressive increase increase
    regressive increase decrease


    Applications
    • Personal income tax
      • Is progressive, meaning it generally rises with income. Help to redistribute society's wealth
      • It is by far the most successive tax to reduce the gap between the rich and the poor.
    • Sales taxes
      • Regressive with respect to income because poor families spend proportionally more of their income when compared to rich families. Overall, the poor family's percent of income spent on sales taxes is greater than the percentage of income spent on sales tax of rich families.
      • For example: if a poor family were to spend all of their $15,000 income, they would pay $750 with a 5% sales tax. A rich family that spends $200,000 of their $300,000 income would pay $10,000 in sales tax. The poor family pays 5% in sales tax (750/15,000), while the rich family pays 3.3% in sales tax (10,000/300,000).
    • Corporate income tax
      • Regressive, except in the aspect where at least part of the tax is passed through to consumers in the form of higher product prices; to this extent, the tax is like a sales tax and is thus regressive.
    • Payroll taxes (Social Security and Medicare)
      • Regressive -Social Security tax applies to only a fixed amount of income, government does not collect payroll taxes on non-wage income (interest, dividends, or rents) property-tax rates are higher in poorer areas, to make up for lower property values.
    • Property taxes
      • Regressive as 1) property owners add the tax to the rents that tenants are charged, 2)in general, property-tax rate are higher in poorer areas because the poor must spend a larger proportion of their incomes for housing.

    *Overall, the US taxation is slightly progressive because the taxes fall upon the higher income families in a greater proportion than on the lower income families. This is because the progressiveness of the income tax generally slightly outweighs the other regressive taxes in place.

    Caution: While the US tax system does not substantially alter the distribution of income, the system of transfer payments does considerably reduce income inequality.



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    Anonymous isn't it unfair for poor people to pay more tax?? (page: 1 2) 30 Dec 16 2008, 9:42 AM EST by mkaga
     
    Thread started: Jan 20 2008, 6:50 AM EST  Watch
    As it we are learning about learning about different types of tax, I realized that althought it is necessary, isn't it unfair for poor people to pay more tax, the tax type-regressive? I know that rich people tried hard that they earn for their efforts but shouldn't we have to help poor people?
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