Question

Rebecca is a policy-maker and she wants to design a fair income taxation system, based on the principle that effort should be rewarded, while economic gains coming from advantages not earned through effort should be redistributed. In other words, she wants to level the playing field. In her world,people only differ in their ability to pay and are otherwise identical. Assume that income is a good proxy for ability (to pay). This assumption implies that high earners have high ability. Assume also that ability is randomly given to each individual at birth and that it remains constant over time. Would Rebecca design a system in which high-earners are taxed more or are taxed less than low-earners? Why?

Answer 1

Tax systems in the U.S. fall into three main categories: regressive, proportional, and progressive.

1. A regressive tax levies the same percentage on products or goods purchased - difficult on low earners.
2. A proportional tax applies the same tax rate to all individuals regardless of income.
3. A progressive tax imposes a greater percentage of taxation on higher income levels, operating on the theory that high-income earners can afford to pay more

Rebecca as a policy-maker wants to design a fair income taxation system, based on the principle that effort should be rewarded, while economic gains coming from advantages not earned through effort should be redistributed   progressive tax is suitable.

• Taxes assessed under a progressive system are based on the taxable amount of an individual's income.
• They follow an accelerating schedule, so high-income earners pay more than low-income earners. Tax rate, along with tax liability, increases as an individual's wealth increases.
• The overall outcome is that higher earners pay a higher percentage of taxes and more money in taxes than do lower-income earners.

This sort of system is meant to affect higher-income people more than low- or middle-class earners to reflect the presumption that they can afford to pay more.

The U.S. federal income tax is a progressive tax system. Its schedule of marginal tax rates imposes a higher income tax rate on people with higher incomes, and a lower income tax rate on people with lower incomes. The percentage rate increases at intervals as taxable income increases. Each dollar the individual earns places him into a bracket or category, resulting in a higher tax rate once the dollar amount hits a new threshold.