Tax Rate Structures and Politicians

Different countries in the world have different tax rate structures. Politicians talk about changing our tax rate structure often every election season. Politicians often state the USA should have a flat tax system instead of a progressive tax system.

In the example below I will explain Proportional, Regressive and Progressive tax systems:

  • Proportional (Flat) Tax System: The same tax rate will apply to any income level.
    • For example if the proportional tax rate is 10% and:
      • Bob makes $1000 he would pay:
        • $1000*.10 = $100 in tax.
      • Jason makes $10,000 he would pay:
        • $10,000 *.10 = $1,000 in tax.

Regressive: A regressive tax is a tax that is proportionally inverse to income. With this type of tax system someone with lower income will pay the same tax as others who have higher income.

  • A great example of this is the sales tax on consumer goods:
    • If Sarah makes $40,000 a year and buys new furniture for $10,000 in a state that has a 7% sales tax:
      • Sarah pays $500 in tax.
    • If John makes $4,000,000 a year and buys new furniture for $10,000 in a state that has a 7% sales tax:
      • John pays $500 in tax.
  • This type of tax is proportionally inverse to income because of what we call:  The Implicit Tax Rate: money wage earners lose because of governmental policy.
    • Sarah’s implicit tax rate is:
      • $500/$40,000 = 1.25%
    • John’s Implicit tax rate is:
      • $500/$4,000,000 = 0.0125%
  • Progressive: A Progressive tax applies a higher tax rate to higher incomes.
    • This is the tax system we use in the USA. Typically these are applied in a marginal tax rate structure. For more information on this please see our post here

For information on the 2016 Presidential Candidates proposed tax plans check out Ballotpedia

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