What is a Dual Rate Income Tax
A dual rate income tax is a tax rate system that charges two separate tax rates based on income levels.
Breaking Down Dual Rate Income Tax
Any income up to the cutoff income level is taxed at the lower rate, and all income over the cutoff point is taxed at the higher rate. This is similar to a flat tax system, except it features two rates instead of simply one.
A dual rate income tax is often advocated in tandem with proposals to streamline the entire tax system by removing most tax deductions and loopholes. For example, a dual rate income tax system may charge 20% on all income up to $100,000 and 25% on every dollar of taxable income beyond $100,000. As a result, if you earned $150,000, your tax liability would be $32,500 ($100,000 x 20% + $50,000 x 25%).
Pros and Cons of a Dual Rate Income Tax
Proponents of the dual rate income tax believe that it is both simpler and more equitable than the existing federal tax law, which has seven separate tax rates as a result of the 2017 tax overhaul. Proponents of the system have claimed that, in addition to reducing the number of tax brackets from seven to two, Congress should abolish most deductions and credits, further simplifying the tax law and relieving economic actors of the burden of completing their taxes each year. Proponents also argue that two rates are more equitable since they punish individuals who want to work hard and earn a lot of money. Furthermore, the great majority of American households would pay the lower, first rate under most dual income tax ideas, implying that most families would contribute the same percentage of their income to the federal government.
Critics of a dual rate income tax contend that it is regressive, meaning that it places an undue burden on poorer Americans who can afford to pay the least in taxes. In the above example, a family earning $100,000 pays the same proportion of their income in taxes to the federal government, 20%, as a family earning $50,000. Dual-rate detractors claim that the first family can pay the $20,000 in taxes owed under this system much more readily than the $10,000 owed by the second family. As a result, this group advocates for additional and higher marginal tax rates in order to transfer the burden of taxes more upon the wealthy.
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