Sunday, March 30, 2014

The tax trap

A fact based opinion.

Who benefits and who loses when income taxes are decreased and sales tax increased?
A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. In terms of individual income and wealth, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer's ability to pay as measured by assets, consumption, or income. These taxes tend to reduce the tax incidence of people with higher ability-to- pay, as they shift the incidence disproportionately to those with lower ability-to-pay.

An example of a regressive tax that applies to all earners:
Social Security tax is an example. For 2007, you pay 6.2% tax on wages up to a maximum wage of $97,500. Therefore:
a. A person who makes $30,000 a year pays $1,860 (30,000*.062) in tax or 6.2% of wages. \
b. A person who makes $200,000 a year pays $6,045 (97,500*.062) in tax or 3% of wages. 
c. A person who makes $500,000 a year still pays $6,045 in tax (97,500*.062) or 1.2% of wages.
Since the richest people pay the smallest percentage of their income in tax, it is a regressive tax.

The Social Security tax definition is not a pure example due to the return of the tax to the payer upon retirement

A better example of a regressive tax is the sales tax. Money spent to buy essential and nonessential items that have a sales tax of 7 percent, for example, hits those with a lower income harder than it hits higher-income individuals. Fees are another example of a regressive tax, because lower-income individuals pay a larger percentage of their income for them. Examples are toll roads, licenses, admission to museums and parks, and parking. A third example of a regressive tax is an excise tax, which is a tax on the production or sale of certain commodities such as alcohol, cigarettes, firearms, gasoline, air travel and telephone services. Excise taxes are typically hidden taxes because they are incorporated into the price of the commodity without consumers' realizing it.

At some income level, dollars not used for consumption escape the sales tax.
Paul Hunter

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