There are three types of tax rate structures: (1) progressive rate, (2) proporti

Question

There are three types of tax rate structures: (1) progressive rate, (2) proportional rate, and (3) regressive rate. The US Federal income tax system currently applies the progressive tax rate structure. A common controversy is whether the progressive tax rate is the best application for the US. Many believe that the proportional tax rate would be a better system for the US Federal income tax rate system. Identify the differences between the three tax rate structures. In your opinion, what structure would be the best structure for the US? Be sure to support your answer with the advantages of the method you select and the disadvantages of the other tax rate structures.

Explanation / Answer

1) Proportional Tax Rate of tax is fixed The amount of tax is a fixed proportion of total income Rate of tax is fixed irrespective wheather the income is high or low 2) Progressive tax It is a tax where the tax rate increases as the income increases Higher income group pays higher tax than lower income group Lowest income group and people below the poverty line pay very small or no amount in taxes 3) Regressive tax The tax rate decrease as the amount of taxable income increases The higher income group pays less taxes than the lower income group It imposes greater tax burden on the lower income group The progressive tax rate is the best for the US , because it is based on the logic of ability to pay principle Higher income people should pay more since they are capable of paying more People who make more money should contribute more to society by paying more taxes Those who make less , have less amount to pay and shpuld pay less The disadvantages of proportional tax rate is It is regressive in nature , thatmeans people who earn less also pay higher taxes than their ability and higher income group pays lesser tax than their ability Regressive tax rate is a tax rates which imposes lower tax rate as the income increases Higher income group pays less which is against the social justice It imposes greater tax burden on the poor Hence , because the above disadvantages of proportional and regressive tax rate , progressive tax rate is best suited for US

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