Other examples of a progressive tax are the estate tax and the luxury tax. Wealthier citizens have more to lose from the destruction of war, so they should pay more for the military. Higher-income people are more likely to travel, and so they benefit more from roads. They are better able to afford it, and perhaps they have more to gain. Policymakers contend that higher-income individuals should shoulder more of the responsibility of paying for the goods and services government provides. In a progressive tax system, a taxpayer’s average tax rate increases as the taxpayer’s income increases. Most developed countries have a progressive income tax. Other examples include user fees to renew a license, tolls, or entry into a park. Everyone purchasing the basket would pay a sales tax of $5. Assume the sales tax is five percent, and a basket of goods costs $100. The average tax rate decreases as the taxpayer’s income increases. A regressive tax is a tax where low-income taxpayers pay a larger portion of their income. Students need to distinguish between flat (proportional), regressive, and progressive tax systems. In some cases, the percentage may not apply to all income and the state may offer a few deductions and exemptions. These include North Carolina, Massachusetts, Utah, and Indiana. Several states have flat income taxes as of 2016. Since no taxes are paid on income exceeding $127,200, payroll taxes are technically regressive. A payroll tax (Social Security and Medicare) is a flat tax because everyone pays 7.65 percent of their income - that is until they earn $127,200, after which the marginal rate falls to zero. The average and marginal tax rates are equal with a flat tax because the next dollar earned is taxed at the same rate (marginal tax rate) as the first dollar earned. The Israelites were commanded by God to pay 10 percent of their income. The oldest example of a flat tax is the biblical concept of tithing. A family earning $100,000 would pay $25,000 in taxes, and a family earning $50,000 would pay $12,500. For example, assume the tax rate is 25 percent. In a truly flat tax, every dollar earned from the first to the last dollar would be taxed at the same rate. When all income is taxed at the same rate, the tax is a flat tax or proportional tax. View FREE Lessons! Definition of a Flat Tax:
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