In: Accounting
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.
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.