In what tax systems do people with higher incomes end up paying more tax dollars?
a. progressive, regressive, and proportional
b. progressive
c. regressive
d. proportional
The correct answer and explanation is:
The correct answer is b. progressive.
A progressive tax system is one in which the tax rate increases as income increases. This means that individuals who earn higher incomes pay a higher percentage of their income in taxes compared to those with lower incomes. In this system, people with higher incomes end up paying more tax dollars because the tax rate rises progressively as income levels go up.
In a progressive tax system, the tax brackets are structured in a way that individuals are taxed at higher rates as they move into higher income categories. For example, someone earning a lower income may pay a tax rate of 10%, while someone with a much higher income may pay a tax rate of 35% or more. The objective of a progressive tax is to ensure that those who can afford to contribute more to government revenue, based on their ability to pay, do so.
This system is based on the concept of vertical equity, which argues that those with higher incomes should bear a larger burden of the tax responsibility. It aims to reduce income inequality by redistributing wealth from higher-income individuals to fund public services and social welfare programs that can benefit lower-income groups.
On the other hand, regressive and proportional tax systems do not have this progressive nature. A regressive tax system actually places a heavier burden on lower-income individuals because the tax rate decreases as income increases. A proportional tax system, also known as a flat tax, charges the same percentage regardless of income, so all individuals, whether high or low earners, pay the same proportion of their income in taxes.
Thus, in a progressive system, higher earners contribute more, both in absolute dollar terms and as a percentage of their income.