TOPIC FOCUS: Classes of taxes

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TOPIC FOCUS: Classes of taxes

Discuss these questions with a partner.

a. How are classes of taxes categorized?

b.  What taxes do you know?

c. What classes of taxes are there in your country?

Exercise 1.

Practice reading the following words and collocations.

a) annually; average; by nature; disproportionately; entities; fraction; households; in a sense; indeed; irrespective of; item; likely; morally; opponents; partially; propensity; quite; regardless; retirees; reversely;

b) basic essentials; counter argument; excise tax; fixed rate; flat cost; gasoline taxes; greater proportion; in percentage terms; income redistribution; inverse relationship; marginal tax rate; merits and drawbacks; parking fees; public goods; payroll tax; sin taxes; social security tax; social welfare; tax burden; tax rate; tolls on roads;

c) amount to; assign; be capable of; be charged; carry over; decrease; encourage; exceed; fund; impose; increase; oppose to someone; penalize; predict; purchase; shift.


Classes of taxes

Taxes can be categorized as either regressive, proportional, or progressive. 

 Regressive taxes impose greater tax burden on the poor relative to the rich. In case of regressive taxes there is an inverse relationship between the tax rate and the taxpayer's ability to pay. People with low income and low ability to pay, will pay higher taxes. This means that it hits lower-income individuals harder. A regressive tax would require a higher amount of tax from the lower income class than from the higher income class. In case of regressive taxes, the average tax rate exceeds the marginal tax rate and it is lower for higher incomes. So income and average tax rate have an inverse relationship. Regressive taxes reduce the incidence of taxes on the rich relative to the poor. It shifts the incidence of taxation disproportionately to those with lower ability to pay. Payroll tax in the USA is an example of regressive taxes.

There are many types of taxes that are considered regressive.

Taxes on essential goods and services that are required for living such as food and clothing. Everyone needs to eat and clothe oneself, regardless of how much money they make, and people with less income tend to spend a greater proportion of their incomes on basic essentials than those with high incomes.

Sin taxes are taxes on items that are thought to lead to undesirable social outcomes such as poor health, like alcohol and cigarettes. Both alcohol and cigarettes are heavily taxed, in part, to discourage people from using them.

Social security is a tax on income earners that helps provide social protections such as giving money to retirees, those in poverty and disabled people. The social security tax can be considered a regressive tax because social security obligation is limited to a certain fixed amount of income. 

Fixed Taxes and Fees

Excise taxes are taxes designed to fund public goods through fees that are often charged at fixed rates. Any type of tax that charges a single flat cost or fee to the taxpayer can be considered a regressive tax, since a flat cost will amount to a greater percentage of income for low-income earners than high-income earners. The things such as tolls on roads, parking fees, fishing and hunting licenses and entrance fees to museums, monuments and parks are examples of regressive fees. Legal fines, such as speeding tickets, are also regressive as the amount charged does not depend on income.A value added tax or sales tax on food, clothing and transportation can be regressive too. Tobacco and gasoline taxes are highly regressive. Lotteries are also regressive by nature.

 A proportional tax (sometimes called a flat tax) is a tax where everyone, regardless of income, pays the same fraction of income in taxes. For example, a person earning $10 million a year and a person making $10 thousand a year would each pay the same percent of their income in taxes. It is a tax where the rate of taxation is fixed, as 10% or 15% or 25%. The amount of the tax is a fixed proportion of one's income. It stays a fixed percent of one's income, irrespective of how high or low the income is. So, a proportional tax applies the same tax rate across low-, middle- and high-income taxpayers. It may also encourage people to earn more since they do not have to pay at a higher tax rate. The biggest example of proportional taxes today would be the sales tax. While sales tax may differ from region to region, every shopper pays the same sales tax.    

    There are arguments on both sides as to the merits and drawbacks of proportional taxes. One of the biggest arguments for proportional or flat taxes is that on their face they are easily argued as the most "fair." Another argument is that a flat tax provides more motivation for people to try and earn more, even at high income levels, because a person wouldn't lose more and more to taxes as he earned more and more money. One more argument against proportional taxes is that it can act as a regressive tax. The fact that everyone pays the same amount of sales tax on a purchase is indeed true; however, a $50 sales tax bill would be a higher percentage of income from someone making $30,000 annually as opposed to someone making $100,000 annually.

    A progressive tax is a tax in which the tax rate increases as the tax base increases. Here the rate of taxation increases as the income increases. A progressive tax takes a larger percentage of income in taxes from the high-income group than it does from the low-income group. For example, personal income taxes in the USA are progressive and so, people with higher income pay a higher percentage of their income in taxes. On the other hand, people with lower income, pay a smaller percentage of their income in taxes.. 

Progressive taxes are based on the logic of the "ability to pay" principle. Higher income people should pay more since they are capable of paying more. The fairness of progressive taxes is built on the fact that those who make more money should also contribute more to society in form of taxes. Those who make less, are less able to pay and so should pay less. The counter argument to progressive taxes is that it penalizes people who work harder and make more money. In a sense, you are being punished for your success. Ideologically progressive taxation is a means of "income redistribution." Individuals who earn more pay higher taxes. Those taxes are then used to fund social welfare programs that help raise the real income of the lower income group in different forms.

Most societies have progressive income-tax systems, since it is viewed as fair for higher-income entities to contribute a higher fraction of their income in taxes, since they are spending a much lower fraction of their incomes on basic necessities.


Exercise 2.

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