Question

The federal personal income tax is an example of a (an) a. excise tax. b. proportional tax. c. progressive tax. d. regressive tax.

Short answer

The federal personal income tax is an example of a \(c. \text{progressive tax}\), as the tax rate increases with the taxpayer's income level, with higher-income individuals paying a higher percentage than those with lower incomes.

Step-by-step solution

1. Understanding Federal Personal Income Tax

Federal personal income tax is a tax imposed on an individual's income. It varies based on the taxpayer's income level, with higher-income individuals paying a higher rate than those with lower incomes. It considers several factors, such as income, family size, and deductions, to calculate the tax liability.

2. Excise Tax

Excise tax is an indirect tax imposed on the sale of specific goods, such as gasoline, tobacco, and alcohol. It is paid by the producer or manufacturer and then typically passed onto the consumer as part of the cost of the goods. This tax type is not related to an individual's income.

3. Proportional Tax

A proportional tax, also known as a flat tax, is one where the tax rate remains constant regardless of the taxpayer's income level. People with different incomes would pay the same tax rate. This does not match the characteristics of the federal personal income tax, as it varies depending on income levels.

4. Progressive Tax

A progressive tax is a tax structure where the tax rate increases as the income level of a taxpayer rises. Taxpayers with higher incomes pay a larger percentage of their income in taxes compared to taxpayers with lower incomes. This reflects the characteristics of the federal personal income tax since it varies based on the taxpayer's income level.

5. Regressive Tax

A regressive tax is a tax where the tax rate decreases as the income level of the taxpayer rises. In other words, as the taxpayer's income increases, the tax burden becomes proportionately lower. This is not similar to the federal personal income tax since it requires higher-income individuals to pay a higher rate. Based on the analysis, the correct answer is: c. progressive tax.

Key concepts

Progressive Tax

A progressive tax system is designed to take a higher percentage of tax from individuals as their income increases. This means that people with modest earnings are taxed at a lower rate compared to those with higher earnings. The primary purpose of this system is to create a more equitable distribution of wealth and to ensure that those who have greater financial resources contribute a larger share of their income to fund public services.

The federal personal income tax in the United States exemplifies a progressive tax. Tax brackets are structured so that a person's tax liability increases with income. This can be visualized by imagining tax rates as stepping up in tiers; as an individual moves up the income ladder, they enter into higher tax brackets. It’s important to understand that not all of one's income is taxed at the same rate in a progressive system; instead, different portions of income are taxed at corresponding rates within their brackets.

Proportional Tax

In a proportional tax system, sometimes referred to as a flat tax system, every taxpayer is charged the same fixed tax rate regardless of their income level. This means whether you earn a small amount or a vast fortune, a fixed percentage of your income will go to the government.

Many find the simplicity of a proportional tax system appealing, as it does not require multiple tax brackets and rates. However, critics argue that it might not be as fair, since the same rate could represent a tougher financial burden for those with lower incomes compared to those with higher incomes. In practice, no major tax system is purely proportional, but some state-level income taxes and certain taxes in other countries employ this model.

Excise Tax

An excise tax is specifically levied on the sale of certain goods, services, or activities. It can be a per unit tax (such as a certain amount of tax per gallon of gasoline) or a percentage of the price (like an ad valorem tax on tobacco).

Unlike progressive or proportional taxes, excise taxes are the same for everyone who purchases the taxed item, making it unrelated to the buyer's income level. Typically, these taxes are included in the price of the product, and while they may affect consumers differently based on their consumption habits, they are not directly measured against or adjusted to anyone's income.

Regressive Tax

A regressive tax takes a larger percentage of income from low-income earners than from high-income earners. It is considered regressive because the tax rate decreases as the individual's ability to pay increases. Sales taxes and excise taxes can often be regressive, as they take a larger relative share of income from those with less disposable income.

Some regressive tax systems are criticized for exacerbating income inequality as they may place a more significant economic strain on lower-income individuals while providing a relatively lighter tax burden on the wealthy. Understanding how regressive taxes work helps highlight the different approaches that governments can take to raise revenue, each with its implications for income distribution and economic behavior.