20 POINTS In this class, we have seen that lump-sum taxes do not distort economi

Question

20 POINTS In this class, we have seen that lump-sum taxes do not distort economic choices as proportional tax rates do. Nevertheless, in reality, we often see proportional taxes, rather than lump 1. sum taxes being used. Why is that? Do an internet search on lump sum taxes versus proportional tax rates and i. write a paragraph discussing one or two disadvantages of using lump sum taxes in the modern economy ii. In light of what you learned from the internet search on the two tax systems, write a paragraph describing the current U.S. federal income tax system by comparing the U.S federal income tax system with the two tax systems - lump sum and proportional.

Explanation / Answer

i. Lump sum taxes refers to the taxes in which a fixed amount of tax amount is deducted from every citizen irrespective of the their salary and this type of tax comes underneath the category of regressive tax because under this tax system citizens who are earning low wages tends to pay more proportion of their salaries as taxes as compared to the people who are earning higher salaries. While under proportional taxes a predefined value of income (proportion of income) is taken as taxes and hence proportion taxes aren’t preferred over lump sum taxes.

ii. Te exact tax structure of US federal income tax system is progressive tax system in which different classes of salaries are defined and under each bracket of salary a fixed amount of proportion tax is deducted by this way people who earn more tends to pay more taxes as compared to the people who earn less then them.

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