Interest income tends to increase with the total income of persons. This means t

Question

Interest income tends to increase with the total income of persons. This means that upper-income groups are likely to receive higher amounts of interest income as a percent of their income than lower-income groups. This implies that a flat-rate tax on interest income will take more dollars per year from the rich than from the poor. Do you agree with this argument? Indicate the market conditions that would have to prevail to prevent the shifting of a tax on interest income to groups other than those who earn interest. What will be the incidence of the tax if those conditions do not prevail?

Explanation / Answer

Answer Below:

A simple explanation of interest income is that the income one invest in funds outside as investments or in private banking entity and the interest amount one receives from it in a course of time. We need to understand the meaning of this term before going ahead with our analysis in answering the other parts of the questions.

I disagree with this statement because of the various reasons:

- Wealthy people must pay higher taxes than poor people, and they should have a higher tax rate. If IRS mentions the tax rate as 30% flat-rate tax on interest income, then both wealth and poor will have to pay their share of taxes based on calculating the flat rate. It is not fair. For example, if family A earns $50,000 and saves $30,000 in the bank. Their interest income based on a flat-tax rate of 30% would be 9,000. Let's consider family B. If they earn $200,000 in income and saves $100,000 in the bank. They would have to pay $30,000 interest income on their saved up amount. Both families cannot pay same interest income based on a flat tax rate. In a case like this, Family B (wealthy) should have charged 40% and Family A (poor) charged 20% so that more interest income will flow from the wealthy than the poor. I am trying to says that this would be a fair argument. Pulling money from the poor with a flat based tax rate system is a wrong idea. Every citizen must pay their fair rate of taxes, but there should be a sense of ethics on who should be charged more and less.

-A progressive tax rate system is the best market condition in order to make this happen. As one's income increases over time, their tax rate would increase simultaneously. This would enable the flow of money from the rich higher than the poor. Currently, the economy is booming. Hence, investors and corporations from the higher income group would invest more money and save more. This would enable them to earn higher interest income. In a time like this, when wealthy pay higher taxes than the poor it would make sense. Any administration during this time cannot propose a flat rate tax system and make the wealthy pay less. This is a market condition that would have to prevail to prevent the shifting of tax. If these conditions do not prevail there would be more abuse of the system in the coming years, for example, the Ponzi scheme during the 2008 recession. To sum up, my argument is that wealthy should pay higher interest income than the poor. This would enable the country to flourish in the long term, or else it would create an unfair advantage for the poor people.

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