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Progressive taxes are taxes that require those who earn more money to pay higher taxes. Personal income taxes in the US are progressive. Proponents of progressive taxes argue that wealthy individuals have a moral obligation to society to pay higher taxes. Opponents argue that progressive income taxation has a negative effect on capital formation and economic growth.
Proportional taxes refer to taxes that equally burden all income groups in a society. Proportional taxes are sometimes referred to as a flat tax. For example, if a society had a proportional income tax of 15 percent, a family with an annual income of $100,000 would pay $15,000 a year in income taxes, while a family with an annual income of $10,000 would pay $1,500 a year in income taxes.
Regressive taxes burden lower-income groups more than higher-income groups. Less affluent individuals spend a higher proportion of their income on regressive taxes, such as sales taxes and excise taxes, than do more affluent individuals. Sales tax is tax that is placed on all items that are sold: food, clothing, furniture, etc. Excise taxes are placed on certain items such as alcohol, tobacco, and gasoline.
The generation of government revenue and the redistribution of income among the population are two central reasons for taxation. When all forms of taxation are considered, some countries, such as the US, actually have more income inequality after taxation than before. Therefore, while taxation does much to generate revenue for the government, it may do little to redistribute resources.
- Davies, D. (1986) United States Taxes and Tax Policy. Cambridge University Press, New York.
- Fullerton, D. & Rogers, D. L. (1993) Who Bears the Lifetime Tax Burden? Brookings Institution, Washington, DC.