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I often see things like:

People who make between "this and that" (range #1) amount of money per month/year must pay 1% in taxes.

People who make between "this and that" (range #2) amount of money per month/year must pay 5% in taxes.

People who make between "this and that" (range #3) amount of money per month/year must pay 50% in taxes.

(Those are not real percentages, but just used to illustrate my point.)

Why isn't the same percentage used for all "tiers"? Isn't the whole point of "per cent" that it means "per 100 equal units"? It already is proportional to their income or to whatever is being measured!

1% of a low income is a little money in absolute terms, but 1% to the person making it. 1% of a massive income is a lot of money in absolute terms, but still 1% to the person or entity making it.

1% is 1%. There seems to be no need for different "tiers". It seems to defeat the entire purpose of using percentages in the first place.

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    Progressive tax vs proportional tax. Taxation is not always about raising a "fair" amount of money, but can also try to address income inequality. Taking 30% from someone living in poverty is a huge burden, so give those a better tax rate and make up the difference by taking more from someone who can afford it. – amon Feb 24 at 18:06
  • You seem to be both asking about terminology (why is the term "percentage" used in progressive tax systems), and policy (why are progressive tax systems used). You should clarify what you're asking, as the second is more of a Politics SE question than a Money SE question. – Acccumulation Feb 25 at 6:33
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I have never seen a tax system like the one you mention. Income tax rates are usually marginal rates. What this really means is that you have something more like this:

1% on the first $10,000 of income

5% on the second $50,000 of income

50% on the third $100,000 of income

I made up all the rates just for illustrative purposes.

From this you get tax brackets:

$10,000 and below is in the 1% bracket.

$10,001 to $60,000 is in the 5% bracket.

$60,001 to $160,000 is in the 50% bracket.

But you're not paying that percent on the whole thing, just the part above the previous bracket.

The purpose of this kind of bracket system is that you are basically giving a tax break to people who earn less money (the "poor") and therefore can less afford taxes because they are just trying to survive and taxing "the rich" a bit more as they have already met all their basic expenses and are out of the survival zone.

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  • There is an additional purpose to using a marginal bracket system (as opposed to the progressive tax suggested by the OPs wording), you don't want to create situations in your tax system where people would lose out by earning $1 more but paying $400 more in taxes. – illustro Feb 25 at 11:23
  • @illustro Although that does happen sometimes, for instance, with benefits that phase out at a certain income level. – Michael Feb 25 at 16:37
  • Very true, but it's usually doesn't manifest in the tax system (though admittedly, I'm not familiar with all of the worlds tax systems). The places I've seen structures like that are all relating to welfare, because they don't want to give money to someone who earns over a certain amount – illustro Feb 25 at 16:40
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You said,

Why isn't the same percentage used for all "tiers"? Isn't the whole point of "per cent" that it means "per 100 equal units"? It already is proportional to their income or to whatever is being measured!

The thing you're missing is that tiered plans (such as the example you've illustrated) are not meant to be proportional. The entire point of this style of tax scheme is to tax people with a higher income more than those with a lower income.

So - you're absolutely correct - brackets aren't "equal" in the proportional sense. But that's exactly the reason why they're used.

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Suppose Person A earns $10,000 a year and Person B earns $1,000,000,000 a year.

If you tax Person A at 50%, you'll cause enormous damage to their quality of life and get $5,000 of revenue as a result. The revenue is small compared to the damage, so we should use a much lower tax rate.

If you tax Person B at 50%, you'll cause a very tiny impact to their quality of life and get $500,000,000 of revenue as a result. The revenue is large compared to the damage, so we should use this or even a higher tax rate.

Higher tax rates make more sense for richer people than poorer people.

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Why isn't the same percentage used for all "tiers"? Isn't the whole point of "per cent" that it means "per 100 equal units"? It already is proportional to their income or to whatever is being measured!

What you are proposing is a switch to a flat tax. It initially seems so easy to declare a single percent, and everything is taxed at that rate. There would be no deductions, no exemptions, no credits, and no brackets. The tax forms would essentially go away.

One trap that some people fall into is that they forget that the tax bracket is the marginal rate. They look at a flat tax and think as long as it is below my tax bracket, I will save money. But not everybody can save money.

They also forget that every $ of tax is much more difficult a burden for somebody in a low paying job. That inequality of the burden drives the system back to credits, exemptions, deductions, and brackets.

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