subject: 3 Main Types Of Taxes Based On Tax Rates [print this page] In many ancient cultures, taxes were only paid by citizens of a country who had been conquered by another country, and the money would end up in the pockets of a few aristocrats. In the modern world, it is a reality for many people - including monarchs.
In applying this tax, governments seek to attain certain objectives, and these objectives determine the type of tax that they will impose on the people. They can be classified based on various features. In this analysis, we are going to look at three types of taxes based on the rates.
Proportional
Proportional taxation is where a fixed rate is applied regardless of the income amount. Take note that what remains fixed is the rate and not the amount.
For example, the government might decide to charge a flat rate of 30% on the income earned by everyone. Here, someone earning 10,000 will pay $300 while someone earning $1,000,000 will pay $30,000.
The main advantage of this system is that it does not discourage hard work since the marginal tax rate is the same regardless of the income amount. On the other hand, the disadvantage is that it does not help to redistribute income from the rich to the poor.
Progressive
A progressive tax system is one where the rates increase with an increase in income up to a certain point. Since the rate is increasing, the amount is increasing even further since its increase is brought about by an increase in the rate and an increase in the taxable income.
For example, the first $100,000 of someone's income may be taxed at 10% while the next $100,000 may be taxed at 20%. This way, someone earning $200,000 will be required to pay $30,000 in taxes ($10,000 from the first $100,000 and $20,000 from the next $100,000.)
This is the most common type of direct tax because it is said to distribute income by transferring wealth from the rich to the poor. Unfortunately, this type of taxes tends to discourage people from working hard since the more they earn, the will be their marginal tax rates.
Regressive Taxes
Apart from the proportional and the progressive taxes, we also have the regressive taxes. This type of tax ensures that people earning different amounts of income pay the same amount of taxes. This means that the tax rates decrease with increase in income.
For example, if the government charged a constant tax figure of $20,000, someone earning $100,000 will be paying 20% of his income on taxes. On the other hand, someone earning $1,000,000 will be paying only 2% of his income as taxes.
Obviously, such a policy is usually unpopular since it does not help to redistribute income from the rich to the poor. It s also considered as unfair to the poor since the pinch that will be felt by a low income earner is not the same as the one that will be felt by a high income earner if both are paying the same amount of tax.
In most cases, systems try to combine tax types since different tax systems seem to aim at achieving different tax objectives.
by: David de Souza
welcome to Insurances.net (https://www.insurances.net)
