What Is Tax Fairness?
Tax equity is the idea that a government’s tax system should be equitable to all people. However, opinions disagree on how to achieve tax equity.
The options vary, but the most fall into one of three general taxing regimes. Regressive taxes, progressive taxation, and mixed taxation are among them.
- Regressive tax supporters argue that it is fair since everyone pays the same tax for the same products and services.
- Proponents of a progressive tax argue that the wealthy can afford to pay more into a system that has benefited them more.
- Taxation in the United States is a hybrid system. The FICA tax is regressive, while the income tax is progressive.
In general, tax fairness proponents think that taxes should be levied based on a person’s or company’s capacity to pay, but should be balanced by the requirements of society as a whole for government services.
Understanding Tax Fairness
Any concept of tax fairness seeks to establish a balance between what is fair to individuals and what is fair to society as a whole.
The Individual’s Right
A tax system that prioritizes individual justice will enable its residents to retain the majority of their earnings or wealth since it is, after all, their property. However, such a tax system tends to contain numerous exclusions for specific instances, which are formed in response to special tax treatment requests by interest groups.
In theory, the most worthy persons will pay the least amount of tax, but there may not be agreement on who is the most deserving. Some would point to the poorest and most vulnerable people. Others may refer to the wealthiest as being the most capable of benefiting others by spending money and generating employment.
The Common Good
A tax system that prioritizes the benefit of society as a whole may infer that the main role of the tax code should be wealth redistribution. Generational wealth, for example, may be taxed by a high inheritance tax, or wealthy earnings may be taxed higher to put their salary in line with that of ordinary employees.
Most tax fairness supporters push for removing loopholes in the tax system that enable some people and organizations to avoid paying taxes entirely, even when each of those loopholes is vigorously defended by persons or groups that think they are entitled to preferential treatment.
Three Tax Concepts
Tax justice organizations often choose one of three potential tax schemes. Regressive taxes, proportional taxation, and progressive taxation are the three systems.
Regressive taxation levies the same amount on everyone, regardless of their capacity to pay. As a consequence, the poor pay a far higher rate as a proportion of their disposable income than the affluent.
This sort of taxation is exemplified by a state sales tax. For a gallon of milk, the lowest customer pays the same amount of tax as the wealthiest.
A flat tax is often referred to as a regressive tax. Consider a tax system that applies a flat 15% income tax and no additional taxes. A family of four earning $180,000 will pay $27,000. A household earning $30,000 will pay just $4,500. However, when it comes to tax equity, the lower-income family may be receiving the worst deal. The true quality of life of the family has been damaged, while the wealthy family has remained unaffected.
Progressive taxes levie a greater tax rate on increasing income levels. The income tax in the United States is progressive, with rates ranging from 0% to 37%.
Contrary to common belief, this does not imply that a wealthy individual in the United States pays 37% of his or her income in taxes. The highest percentage is collected solely on the portion of a person’s income that exceeds a certain threshold. A progressive tax operates in this manner.
Beginning with the 2021 tax year, all individual taxpayers pay no income tax on the first $9,950 of income. Individuals must pay 12% of their income between $9,951 and $40,525, and so on through the tax rates.
A progressive tax rate is intended to impose an effective tax rate that is lowest on the lowest earnings and highest on the highest earners.
Exemptions, deductions, and credits may also be included in progressive taxes to decrease the effective tax rate on specific categories of taxpayers, such as parents with dependent children, or to encourage certain actions, such as saving for retirement or contributing to charity.
Most tax authorities combine regressive and progressive levies in practice.
Many states have both a state-wide sales tax and a progressive income tax.
With the exception of the FICA payroll tax, which is a flat tax, the federal government has a progressive income tax.
Furthermore, both state and federal tax authorities exclude the lowest-income citizens from paying income taxes.
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