Recall the discussion of progressive (tax rate increases as the base increases;
ID: 2454719 • Letter: R
Question
Recall the discussion of progressive (tax rate increases as the base increases; ex. current income tax system) vs. regressive (tax rate decreases as the base increases; ex. Social security taxes) vs. proportional (tax rate stays the same regardless of base; ex. current US sales tax) tax rate structures that we covered in Ch. 1. Which type of tax structure is moral/ethical/“right” in your opinion? Try to think of the effects of the various tax rate structures on different types of taxpayers when justifying your answer.
Explanation / Answer
Progressive Tax structure, It is a "moral/ethical/“right”, because income tax increase as the income increases or decrease as the income decreases. Progressive tax structure is based on "ability to pay" principle. which means if an individual earn less ,so he should pay less tax and higher income earner should pay more tax because they are capable of earning more . Under this tax structure, marginal tax rate is greater than average tax rate. Progressive Tax structure is being used by current federal income tax.
Proportional tax structureit is considered as flat tax ,rate of tax is fixed .In other words, income tax rate does not change with increase or decrease of income. Effect of Proportional tax structure on income of high , medium and low's income earner relatively equally.Burden of income tax will be more on the low income earner because they will have to pay according to fixed rate irrespective of income . For an example, if an individual $2000 under tax rate of 10%, he will pay $200 as income tax , where another individual who earns $20000 he will pay $2000 as income tax , under Proportional tax structure.
It Create equality between marginal tax rate and average tax rate,
Regressive Tax structure , under this structure, tax decrease as the amount of taxable income increases. Higher income earner pay less tax than the lower income earner,burden on lower earner will be more than the higher income earner under this tax structure. An inverse relations can be seen between tax rate and earning capacity of eraner ( high income less income tax on the other hand , less income high income tax).
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