Question

Note: Answer needs to be a minimum of 270 words.

In practice do we have a progressive, proportional, or regressive personal income tax rate system in the US? (ensure the how's, why's, etc)

Answer 1

The United States has a progressive tax system. Before talking about the specifics related to the United States, it is important to understand what is progressive tax system. A progressive tax system is a system where lower tax is imposed on low income earners and the tax rate increases as the income increases.

Just to put things into perspective, the tax rate for individuals in the United States is 10%, 12%, 22%, 24% 32%, 35% and 37%. Therefore, the richest Americans have a top tax bracket of 37% and the poorest American has a tax bracket of 10%.

It is also important to understand why progressive tax system is good for the United States. To understand that point, it is important to note that the GDP in United States is nearly 70% consumption driven. In general, low income households spend a significant portion of their disposable income on consumption of durable and non-durable goods. As income increases, the richer individuals can easily afford the basic necessities.

Therefore, if there is a higher taxation on the lower income, it would put stress on their consumption spending and ability to cover necessities. On the other hand, if the rich are taxed relatively more, the consumption spending does not decline. The government benefits as tax revenue increases and helps in narrowing the budget deficits. It therefore makes sense to have a progressive tax system.

On the flip side, progressive tax system seems to hurt the high income earners and that money is utilized for social welfare. This makes society more socialist than capitalist. Just to put things into perspective, over 40% American households received government benefit in some form or the other.