Overview
This lecture explains tax bases, tax rates, and the three main tax structures: proportional, progressive, and regressive, focusing on their characteristics and effects.
Tax Bases
- A tax base is the item or amount that is taxed, such as income, goods sold, or property.
- Examples include personal income for income tax, goods for sales tax, and property value for property tax.
Tax Rates
- The tax rate is the percentage of the tax base paid as tax.
- For example, a 20% income tax rate means paying 20% of your income in taxes.
Tax Structures
- Tax structure describes how much tax is collected from different groups based on income or spending levels.
Proportional (Flat) Tax
- Proportional tax, also called flat tax, charges the same percentage of income for all income levels.
- Example: Both low and high earners pay 10% of their income.
- Benefits: Simple, easy to calculate, and low administrative costs.
- Criticism: May burden the poor more, so rates must be kept low, limiting government revenue.
Progressive Tax
- Progressive tax takes a larger percentage as income increases, based on the ability-to-pay principle.
- Example: Federal income tax rates increase as income increases (e.g., 10% for low income, 28% for higher income).
- Benefits: Higher earners pay more, reducing the burden on the poor.
- Criticism: More complex and costly to administer.
Regressive Tax
- Regressive tax takes a smaller share of income as income increases.
- Often not intentional; disproportionately affects lower-income earners.
- Example: Sales tax—low earners spend more of their income on taxed goods, so pay a higher effective rate than high earners.
Key Terms & Definitions
- Tax Base — the item or amount subject to taxation.
- Tax Rate — the percentage of the tax base that is paid as tax.
- Proportional Tax (Flat Tax) — a tax taking the same percentage from all income levels.
- Progressive Tax — a tax where the percentage increases as income increases.
- Regressive Tax — a tax that takes a higher percentage from low-income earners than from high-income earners.
Action Items / Next Steps
- Review Chapter 12, Section 2 for the ability-to-pay principle.
- Read Chapter 12, Section 3 for more examples and details on tax structures.