Which taxes are regressive

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ET Engage. Tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. In economics, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. The key concept is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply. Tax incidence does not consider the concept of tax efficiency or the excess burden of taxation, also known as the distortionary cost or deadweight loss of taxation, is one of the economic losses that society suffers as the result of a tax.

For example, United States Social Security payroll taxes are paid half by the employee and half by the employer. However, some economists think that the worker is bearing almost the entire burden of the tax because the employer passes the tax on in the form of lower wages. The tax incidence is thus said to fall on the employee and due to the need for workers for a particular job, the tax burden also falls, in this case, on the worker.

In this example, consumers bear the entire burden of the tax; the tax incidence falls on consumers. On the other hand, if the apple farmer is unable to raise prices because the product is price elastic if prices rose, more demand would be lost than extra revenue gained , the farmer has to bear the burden of the tax or face decreased revenues: the tax incidence falls on the farmer.

When the tax incidence falls on the farmer, this burden will typically flow back to owners of the relevant factors of production, including agricultural land and employee wages. Shared tax incidence : The imposition of a tax can result in a reduction to both consumer and producer surplus relative to the pre-tax scenario. Where the tax incidence falls depends in the short run on the price elasticity of demand and price elasticity of supply.

Tax incidence falls mostly upon the group that responds least to price the group that has the most inelastic price-quantity curve. If the demand curve is inelastic relative to the supply curve the tax will be disproportionately borne by the buyer rather than the seller. If the demand curve is elastic relative to the supply curve, the tax will be borne disproportionately by the seller.

In the example provided, the tax burden falls disproportionately on the party exhibiting relatively more inelasticity in the situation. This characteristic results in a reduction of the ability of the party to participate in the market to the level of willingness that would have been present in the absence of the tax. The loss is conceptually defined as a loss of surplus and the loss of surplus is characterized as deadweight loss.

Policy makers evaluate the surplus and deadweight loss in relation to the imposition of a tax in order to better evaluate the efficiency of a tax or the distortion that the imposed tax causes on the attainment of market equilibrium. Policymakers must consider the predicted tax incidence when creating them.

If taxes fall on an unintended party, it may not achieve its intended objective and may not be fair. Tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply.

Explain how elasticity influences the relative tax burden between suppliers and consumers demand. Tax incidence refers to who ultimately pays the tax, the producer or consumer, and the resulting societal effect. If a producer is inelastic, he will produce the same quantity no matter what the price. By contrast, the progressive income tax has to be calculated to determine the bracket, how much is earnt on that additional income, and how much is charged because it comes from capital.

It requires thousands of workers just to administer such a system, but a regressive flat tax is simple. This is where skilled professionals leave the country to find work elsewhere. By implementing a progressive system that taxes the rich at a higher rate provides an incentive for highly skilled professionals to move elsewhere.

All that work and effort, only for half their income to be taken away. As a result, they may look to other nations that provide a more regressive tax system that is objectively fairer. A regressive tax imposes a higher tax burden on those with lower incomes than those at higher incomes. Therefore, it creates a downwards pressure on the number of local income households can save. They are forced into paying a higher percentage of their incomes in tax, thereby leaving less for them to save.

With lower savings, it becomes difficult to get onto the housing ladder and gain equity through the property. In turn, a poverty trap is created whereby low-income households are burdened by taxes — preventing them from accumulating capital.

It goes without saying that the higher the tax, the higher the price. Yet for regressive taxes such as tariffs, it is often questioned. The price of a tariff will not always be passed on to the customer as the imported may take some of the cost. However, it falls predominantly on the consumer as businesses protect their profit margins. The consumer also faces higher prices for other goods. For instance, excise taxes are imposed on goods such as sugary drinks, cigarettes, and alcohol — products that are often associated with low-income households.

Regressive taxes such as excise taxes, tariffs, and sales taxes, all help reduce demand for goods. That lower level of demand makes it more difficult for a wider variety of firms to make a profit. As prices as higher, there is less demand, and because there is less demand, there is less room for competition. At the same time, smaller levels of demand make it more difficult for existing firms to fully benefit from the same economies of scale. Taxation will always be a moral issue.

However, when it starts affecting a significant number of households disproportionately, people can become discontented. If they see, as they do today, millionaires and multinational companies paying little tax, it becomes a significant moral issue.

We like to see a fair system, so when the public see the rich paying little tax, there is understandable outrage. In turn, we often see sharp turns in the politic sphere — either sharply to the left, or sharply to the right.

Sales taxes are typically quoted as tax-exclusive rates. Income tax rates, however, are typically quoted as tax-inclusive rates. Although there is no one true method of reporting the rate, it is crucial to understand which approach is being used, since the tax-inclusive rate will always be lower than the tax-exclusive rate and the difference grows as the rates rise. At a rate of 1 percent the difference is negligible, but a 50 percent tax-exclusive rate corresponds to a 33 percent tax-inclusive rate.

William G. Exemptions would be provided for business purchases for resales, purchases to produce taxable property or services, and exports. Expenditure on education would be exempted on the grounds that it is an investment. The sale of newly constructed single-family homes would be taxed, as would improvements to existing single-family houses. Already existing owner-occupied housing would be exempted.

All financial intermediation services would be taxed. The tax would exempt expenditures abroad by U. Notably, the proposals would tax all federal, state, and local government consumption items, as well as government investment in equipment and structures. The plans would offer demogrants, or rebates, for each family, equal to the tax rate times the poverty line, the amount of income a family needs officially to stay out of poverty.

Both plans would allow businesses who remit taxes to government to retain a small percentage of revenues collected as compensation for collection costs. A national retail sales tax structured along these lines would represent a sharp break from the current tax system. First, the tax base would shift. Currently, our system taxes something loosely related to income. Under a pure sales tax, the base would be consumption.

Second, marginal tax rates currently rise with income, but would be flat in a sales tax. Third, for reasons of social policy, tax administration and politics, the income tax contains a series of deductions, exemptions, and tax credits.

Under the proposed sales tax, all of these would be eliminated. Sales taxes already exist in 45 states, the District of Columbia, and over 6, localities.

State tax rates range from 3 percent to 7 percent. While state sales taxes are widely viewed as successful, they are very poor models for federal reform.

States only tax about half of private consumption of goods and services. Many states exempt goods such as food, electricity, telephone service, prescription medicine and so on.

Most states do not tax services very well, if at all. In addition, between 20 and 40 percent of state sales tax revenue stems from business purchases, which are not retail sales. This causes cascading of the sales tax, which distorts relative prices in capricious ways and gives firms incentives to merge with other firms in order to avoid the tax. States often do not require their own government to pay sales taxes.

And states do not provide demogrants; instead they help the poor by exempting specific items like food. These findings suggest that running a pure, broad-based sales tax as envisioned by S-T and AFT could be quite difficult in practice. Determining the appropriate tax rate in a national sales tax can be tricky. For example, if a there is zero tax evasion, b state and local taxes do not change, c the tax base is not reduced by political or other factors, d nominal government spending is held constant, and e transition issues and economic growth are ignored, the AFT proposal would require a 23 percent tax on a tax-inclusive basis, or a 30 percent tax rate in the more familiar tax-exclusive approach.

All of the following rates are tax-exclusive. But realistic adjustments for each of the stringent conditions listed above raises the estimated tax rate. The tax evasion rate under the income tax is between 15 and 20 percent. Evasion issues are discussed in the next section; here we simply note that a 15 percent evasion rate in the sales tax, which is probably conservative, would raise the rate to 35 percent. In the absence of federal income taxes, states would likely have to convert their own income taxes to sales taxes and conform closely to the federal tax base.

Add in the revenues from existing state sales taxes, and the combined federal and state sales tax rate would climb to 45 percent. Suppose the tax base were reduced by one-third from the pure consumption tax proposed. In light of all the preferences in the current income tax, and the exemptions in state sales taxes, this is probably not an unreasonable assumption.

It would come about, for example, if just food and health were exempted, or if just government expenditures were exempted.