2. Progressive vs. Regressive Taxes Flashcards
What is the challenge for policy makers when designing tax systems?
Designing one that meets revenue needs without unduly burdening taxpayers or stifling economic activity
How do policymakers design a tax system that meets revenue needs without unduly burdening taxpayers/stifling economic activity?
- Setting appropriate tax rates
- Ensuring compliance
- Minimizing administrative costs
What are the 2 fundamental approaches to taxation?
- Progressive taxes
- Regressive taxes
What do progressive and regressive taxes reflect?
How tax rates or burdens change as income or wealth changes
How is a progressive tax system structured?
So that the tax rate increases as an individual’s income or wealth increases; individuals pay higher rates as their income increases
In a progressive tax system, individuals pay ____ rates as their income ________
Higher, increases
Who pays a larger percentage of their income in a progressive tax system?
Higher earners pay a larger percentage of their income in taxes compared to lower earners
How are Canadian personal income taxes calculated?
Using a progressive tax system
What principle is a progressive tax system based on?
The principle of “ability to pay”
What do progressive taxes aim to reduce?
Economic inequality by redistributing wealth
How are progressive taxes designed to increase the collection of taxation revenue to fund public services and social programs that are utilized by the population?
By imposing a higher tax burden on those with greater financial capacity, while easing the burden on those with lower income
Why do critics argue that progressive tax systems may discourage higher earnings or investment?
Due to higher tax rates on additional income
What were the federal income tax rates and their respective taxable income thresholds?
15%: on the portion of taxable income that is $55,867 or less, plus
20.5% on the portion of taxable income over $55,868 up to $111,733, plus
26% on the portion of taxable income over $111,733 up to $173,205, plus
29% on the portion of taxable income over $173,205 up to $246,752, plus
33% on the portion of taxable income $246,752
If a taxpayer earns $100,000, how much do they pay in income taxes?
- First $55,867 is taxed @ 15% ($8,380)
- Next $44,133 is taxed @ 20.5% ($9,047)
- Total federal tax = $17,427
How do regressive taxes work?
Apply the same tax rate regardless of income
What are the benefits of a regressive tax system?
Simple to administer and can be effective at generating income
What are cons of a regressive tax system?
Imposes a greater relative burden on lower-income individuals than on higher-income individuals
How are many regressive taxes applied?
As a fixed amount or rate, regardless of income
What are examples of regressive taxes?
- Sales taxes
- Excise taxes
- Payroll taxes
How do regressive taxes disproportionately impact those with lower incomes?
Because of their uniformity
The regressive tax rate _______ as the taxable base (income or consumption) _________
Decreases, increases
Mario and Mario, are friends, and they’ve both just purchased a new home individually. They’re both looking to purchase new appliances for their homes and find the same appliance package that costs $10,000. The 13% HST rate is applicable on the purchase. How much HST is paid on the $10,000 appliance purchase
$1,300
Maria has an annual salary of $120,000, while Mario has an annual salary of $70,000. How does an HST of 13% on a $10,000 purchase impact each of them?
Maria: HST paid/Income = $1,300/$120,000= 1.1% of income
Mario: HST paid/Income = $1,300/$70,000= 1.9% of income
While Maria and Mario both paid $1,300 in HST, a larger percentage of Mario’s income was required to pay the same amount of tax
How does the government reduce the impact of regressive taxes?
Offer methods
