Money and Business

What Are the Types of Taxes Based on Income

In a lot of old cultures, taxes were paid by the citizens of a certain country who have been conquered by another nation and this money would always end up being in the hands of some aristocrats. In this modern world, however, taxes are a reality for so many individuals – and this includes monarchs.

When a government applies tax, it seeks to attain some specific objectives, and all of these goals determine the kind of tax which will be imposed on the people. They may be classified depending on several features. This article will discuss the three kinds of taxes based on rates.

Proportional

Proportional tax is when a fixed rate would be applied and the income amount is not considered. Be mindful that in this kind of tax, the rate is what remains fixed and not the actual amount.

For instance, the government would charge a 30% flat rate on the income which is earned by everyone. In this situation, an individual earning $10,000 must pay $300 while a person earning $1,000,000 must pay $30,000.

The primary advantage of this kind of system is that hard work is not discouraged because the marginal tax rate would be the same regardless of one’s income. However, the disadvantage is that redistribution of income from the rich to the poor is not made possible.

Progressive

In a progressive tax system, the rates increase if there is an increase in income up to a specific point. Since rates are increasing, the amount would also increase further because the increase is caused by an increase in the taxable income and the rate.

For instance the first $20,000 of an individual’s income may be taxed at 10% and the next $20,000 would be taxed at 20%. In this way, a person who is earning $200,000 is required to pay $30,000 for taxes ( $20,000 from the initial $100,00 of income and another $20,000 in the next).

This kind of tax is not very common because it is believed that it distributes money by transferring money from the hands of the rich to the poor. However, the thing about this type of tax is that it discourages people from hard work because the more money they earn, their marginal tax rates would also increase.

Regressive Taxes

Aside from the progressive and proportional taxes, there are also regressive taxes. This kind of tax guarantees that individuals who are earning different amounts of income would pay the same taxes. This means that the tax would decrease with an increase in the income.

For instance, if the government ha charged a tax figure of $20,000, a person who is earning $100,000 would pay 20% of his income to taxes.

This kind of policy is kind of unpopular because it does not help in the redistribution of wealth from the rich to the poor. This is also considered as unfair to the poor because the burden which is felt by a low income earner is not the same as the one felt by those who have high income if both parties would pay the same tax amounts.

In many cases, tax systems are often a combination of these kinds of taxes so that specific tax objectives would be met.

Money And Business