A number of people have argued for a flat tax with each person getting a persona

Question

A number of people have argued for a flat tax with each person getting a personal exemption of, say, $10,000, meaning that they pay zero tax on the first $10,000 of income and then 20% on all income above that. Is such a flat tax progressive, proportional, or regressive? Offer an example to demonstrate your answer. A number of people have argued for a flat tax with each person getting a personal exemption of, say, $10,000, meaning that they pay zero tax on the first $10,000 of income and then 20% on all income above that. Is such a flat tax progressive, proportional, or regressive? Offer an example to demonstrate your answer.

Explanation / Answer

a regressive tax system, individuals and entities with low incomes pay a higher amount of that income in taxes compared to high-income earners. Rather than implementing a tax liability based on the individual or entity's ability to pay, the government assesses tax as a percentage of the asset that the taxpayer purchases or owns.

For example, a sales tax on the purchase of everyday products or services is assessed as a percentage of the item bought and is the same for every individual or entity. However, a sales tax of 7% has a greater burden on lower-income earners than it does on the wealthy because the ability to pay is not taken into consideration. Regressive taxes include real estate property taxes, state and local sales taxes as well as excise taxes on consumables such as cigarettes, gasoline, airfare or alcohol.

A proportional tax system, or a flat tax system, assesses the same tax rate to taxpayers regardless of income or wealth. It is meant to create equality between marginal tax rate and average tax rate paid. Under a proportional tax system, individual taxpayers pay a set percentage of their income regardless of total income earned.

For example, an income tax of 10% that does not increase or decrease as income rises or falls results in a proportional tax. In this example, an individual who earns $20,000 annually pays $2,000 under a proportional tax system, while someone who earns $200,000 each year pays $20,000 in taxes. Some specific examples of proportional taxes include per capita taxes, gross receipts taxes and occupational taxes.

The current federal income tax is a progressive tax system, in that the proportion of tax liability rises as an individual or entity's income increases. Tax burdens are meant to be more of an imposition to wealthy, high-income earners than they are to low- or middle-class individuals.

Under a progressive tax system, taxes assessed on income and business profits are based on a progressive or increasing tax rate schedule. Marginal tax rates under a progressive tax system are often higher than the average tax rates that are paid. Estate taxes are another example of progressive taxes, as a greater burden is placed on wealthy individuals.

Thus from the above discussion, we can say that a proportional tax, also referred to as a flat tax, impacts low-, middle- and high-income earners relatively equally. A progressive tax has more of an impact on higher-income individuals and businesses, and less of a financial impact on low-income earners.

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