2014 s Most & Least Fair State Tax ′Systems

Tax Structures

• Under the proportional taxes, each income group has the same percentage rate of tax to pay – 10%

• In the regressive tax structure, the lower income individuals pay a greater percentage of their income in taxes than do the upper income individuals

• In the progressive scenario, the lower income individuals pay a lower percentage of their income than do the upper income. As income increases, so does the percentage of taxes paid

Proportional Taxes

A proportional tax requires the same percentage from each person’s income

A sales tax is an example

This tax affects the less wealthy persons more heavily than it does the richer ones

The amount taxed on any item is the same dollar amount for each, but it represents a larger share of the less well-off person’s financial resources 9.75%

Sales Tax

Proportional Sales Taxes can be Regressive on Individuals

Poorer people tend to spend a greater %age of their income on basic living cost items –– Food, Clothing– Shelter, Transportation…

in contrast to those at the higher income levels.

Proportional Sales Taxes, cont.

The spending habits of two families with incomes of $50,000 and $75,000 may differ significantly.The basic necessities of life – bread, milk, and butter, for example – differ little in quantity purchased by a family of four at these income levels.

Example: Proportional Tax -- Regressive Effect

• Groceries for a family of 4 (2 teenagers) might cost $200/week • A sales tax of 4.5% would be $9/wk• Over 1 year, the sales tax on

groceries would total $468• For a family with an income of

$100,000/yr. = .468% of income • For the same family (same eating

habits) earning $50,000/yr., sales tax on groceries = .936% of income

Proportional Sales Taxes Tax the Wealthier, Less

The family with the higher income level spends a lower percentage on the sales tax related to these items.

But Proportional Sales Taxes Tax The Less Wealthy, More

The family with the lower income level spends a higher percentage on the sales tax related to these items.

Regressive Taxes

A regressive tax requires those with higher incomes pay lower percentages of their income.

Social security taxation system

At the beginning income levels all individuals pay 7.65% of their income in FICA tax

FICA taxes are not collected after one’s income reaches $68,400

Regressive Taxes, cont.

FICA* is a regressive tax.

An individual earning $68,400 would pay $5,232.60 each year in FICA taxes.

An individual earning twice that rate, or $136,800, would pay the same FICA tax amount or 3.825% -

1/2 the % of income that the $68,400 earner would pay!!

*FICA - Federal Insurance Contributions Act

Progressive Taxes

Progressive taxes are those that increase as a percentage along with income

Federal income taxes are designed to be progressive

Tax Brackets – 2014 Taxable Income

Individual Taxes Paid Taxes as a Income % of Income

Proportional Taxes1 $10,000 $1,000 10%2 $50,000 $5,000 10%3 $100,000 $10,000 10%

Regressive Taxes1 $10,000 $500 5%2 $50,000 $2,000 4%3 $100,000 $3,000 3%

Progressive Taxes1 $10,000 $300 3%2 $50,000 $2,000 4%3 $100,000 $5,000 5%

Illustration: Proportional, Regressive, & Progressive Taxes

Examples of the 3 Tax Classifications

“Good” taxes

are are generally considered to be

progressive

while “Bad” taxes

are considered to be

regressive.