Imagine a friend says that he doesn’t want to take a job that pays slightly more
ID: 2612847 • Letter: I
Question
Imagine a friend says that he doesn’t want to take a job that pays slightly more money only because he will be bumped into the next tax
bracket and end up taking home less income after taxes.how would you advise this friend?
Define marginal tax rates. Then, explain why tax rates in the United States were designed to be marginal.
In the Unit 2 lecture and in the Unit 3 lesson on taxes, you learned that Texas has a tax system that is generally “regressive” because it relies
heavily on sales taxes rather than income taxes. What are the definitions of regressive, flat, and progressive when it comes to taxes? Why is a
sales tax considered a regressive tax? Should Texas adopt an income tax to make the tax system less regressive? Why or why not?
Explanation / Answer
Taxation is based on slabs. For example, lets say tax rate for slab 0 - 10000 dollars is 10 % and 10001 dollars and above is 20 percent. A person earning 10000 or below will be taxed at 10 percent but a person earning above that will not have a 20 percent tax rate applicable on his entire salary. Instead he will be taxed at 10 percent tax rate for his first 10000 dollars earning and any amount above that will be taxed at 20 percent. Thus going into a higher tax slab doesnot reduce ones earning to a value lesser than the take home pay for being in a lower tax slab. In this case marginal tax rate is 20 percent for earnings greater than $10000 however the actual tax rate is lower due to progressive increase in applicable tax rate. Tax rates are designed to be marginal so that lower income individuals are taxed at a lower rate compared to those earning more.
Regressive tax : Tax rate decreases as amount to be taxed increases.
Flat tax : Tax rate is same for all amounts
Progressive tax : Vice versa of regressive tax
Sales tax is considered a regressive tax as the tax rate applicable decreases with greater sale amount.
Texas govt should rely on progressive income tax rather than a regressive sales tax because regressive sales tax impact the poor households as they have to pay a greater proportion of their income as taxes while purchasing their daily essentials.