Question

In: Accounting

Discuss at least one purpose of progressive tax rates and how they differ from proportional tax...

Discuss at least one purpose of progressive tax rates and how they differ from proportional tax rates. Provide two examples of taxes that apply progressive rates.

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Expert Solution

A progressive tax is a tax in which the tax rate increase as the taxable amount increase . Progressive taxes are imposed in an attempt to reduce the tax incident of people with a Lower ability to pay , as such taxes shift the incidence increasingly to those with a higher ability to pay.

Taxes assessed under 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 ,increase as an individual wealth increase .The overall outcome is that a higher earners pay higher tax and more money in taxes than do lower income earners.

A proportional tax also referred to as a flat tax ,affects low -middle -high income earners relatively equally . They all pay the same tax rate,regardless of income. A progressive tax has more of a financial impact on higher income individuals than on low income earners.

In the U.S federal taxes operate under a progressive system .In 2020 federal progressive face rate are 10% 12% 22% 24% 32% 35% and 37%. The first tax rate of 10% applies to income of less than $9875 for single individuals and $19750 for married couple filing joint tax returns.The highest tax rate of 37% applies to income over $518400 fir single taxpayers and $622050 for joint married fillers.

A single taxpayer who has taxable income of $50,000 in 2020 for example would not pay the third rate of 22% on their income .Instead they would owe 10% on the first $9,875 of income and 12%on income from $9876 to $40125.

The taxpayer in this example would owe a total of $5802.50 .The 10% rate on the first $9875 us 987.50 and the 12% rate on the remaining $ 40125 is $4815.


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