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The Progressive Tax Principle

Question

Under which taxation principle does the percentage of income paid in taxes increase as income increases?

a. the progressive tax principle

b. the ability-to-pay principle

e. the regressive tax principle

d. the proportional tax principle

e. the benefits-received principle

Answer:

a. the progressive tax principle

Explanation

A progressive taxation Principle is a tax structure in which individuals or entities with higher incomes pay a higher percentage of their income in taxes compared to those with lower incomes. The idea behind progressive taxation is to create a fairer distribution of the tax burden, with those who can afford to contribute more doing so, while those with lower incomes pay a smaller portion of their earnings in taxes. This system is often used by governments to promote income equality and fund various public services.

Here’s a simple example to help explain how a progressive taxation system works:

Let’s consider a hypothetical country that has a progressive income tax system with three income brackets and tax rates:

  1. Income up to $20,000 is taxed at a rate of 10%.
  2. Income between $20,001 and $50,000 is taxed at a rate of 20%.
  3. Income over $50,000 is taxed at a rate of 30%.

Now, let’s look at two individuals, Alice and Bob, who earn different incomes in this country:

  1. Alice earns $15,000 per year.
  2. Bob earns $60,000 per year.
  3. Alice’s Tax Calculation:
    • Alice’s income of $15,000 falls into the first tax bracket.
    • She owes 10% of her income in taxes.
    • Tax owed = $15,000 * 0.10 = $1,500.
  4. Bob’s Tax Calculation:
    • Bob’s income of $60,000 falls into the third tax bracket.
    • He owes 10% on the first $20,000, 20% on the next $30,000, and 30% on the remaining $10,000.
    • Tax owed = ($20,000 * 0.10) + ($30,000 * 0.20) + ($10,000 * 0.30) = $2,000 + $6,000 + $3,000 = $11,000.

In this example:

  • Alice, with her lower income, pays $1,500 in taxes, which is 10% of her income.
  • Bob, with his higher income, pays $11,000 in taxes, which is roughly 18.33% of his income.

As you can see, the progressive taxation system imposes a higher tax rate on Bob’s higher income compared to Alice’s lower income. This progressive structure aims to ensure that those who earn more contribute a larger share of their income to support government programs and services, while those with lower incomes are less burdened by taxes.

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