Question

In: Accounting

In your first post, create a scenario that exemplifies one of the following tax rate structures:...

  • In your first post, create a scenario that exemplifies one of the following tax rate structures:
    • Progressive
    • Regressive
    • Proportional
  • Within your scenario, provide evidence of the administrative procedures and tax laws.

Solutions

Expert Solution

A progressive tax is a tax in which the tax rate increases as the taxable amount increases. The term "progressive" refers to the way the tax rate progresses from low to high, with the result that a taxpayer's average tax rate is less than the person's marginal tax rate. The term can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Progressive taxes are imposed in an attempt to reduce the tax incidence of people with a lower ability to pay, as such taxes shift the incidence increasingly to those with a higher ability-to-pay. The opposite of a progressive tax is a regressive tax. An example of a regressive tax would be a sales tax, with a sales tax a larger proportion of income is taxed to the poor than the rich.

Progressive taxation is often suggested as a way to mitigate the societal ills associated with higher income inequality, as the tax structure reduces inequality, but economists disagree on the tax policy's economic and long-term effects.

The income tax system in the United States is considered a progressive system, although it has been growing flatter in recent decades. In 2020, there are only four tax brackets, with rates of 10%, 12%, 22%, and 24%. There were 16 tax brackets in 1985. (In practice, there are actually seven brackets in 2020 because the higher percentage rates are imposed only on the portion of the taxpayer's income that exceeds the lower bracket rather than on the entire income.).

Advantages of a Progressive Tax:-

On the pro side, a progressive tax system reduces the tax burden on the people who can least afford to pay. That leaves more money in the pockets of low-wage earners, who are likely to spend all of that money on essential goods and stimulate the economy in the process. A progressive tax system also tends to collect more taxes than flat taxes or regressive taxes, as the highest percentage of taxes is collected from the highest amounts of money. A progressive tax also requires those with the greatest amount of resources to fund a greater portion of the services that all citizens and businesses rely on, such as road maintenance and public safety.

Disadvantages of a Progressive Tax:-

Critics of progressive taxes consider them to be a disincentive to success. They also oppose the system as a means of income redistribution which punishes the rich and even the middle class. Opponents of the progressive tax generally are supporters of low taxes and correspondingly minimal government services.

Examples of Progressive Tax:-

Investment income taxes: These are taxes on most of the income-generating activities. They mostly fall on those with excess money to save and engage in investment.

Tax on interest earned: Interest is only earned from savings or investments. Those who can manage to do these things are taxed.

Rental earnings: Although there is a chance to deduct all the costs associated with building operations, once they are done, this is a very progressive kind of tax since it targets those who invest in rental property.

Estate tax: This is a form of tax levied against those who succeed a deceased. It applies only if the value of the estate of the deceased is above a certain amount as set by the government.

Tax credits: These are benefits and perks awarded to less fortunate citizens by the government to save them some cash. They are many and might include earned income tax credit, elderly and disabled tax credit, child tax credit, or retirement savings contribution credit.


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