A person considering becoming an accountant, finance professional, financial advisor or related expert may want to know, “How are the three tax rate systems similar?” This is important to know because the similarities of the three tax rate systems could make it easier for a person to do their job. Familiarity with how the different tax rate systems are similar to each other is a good starting point for a career in accounting or finance.
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Regressive Tax System
Regressive taxes include property taxes, sales taxes, sin taxes, and excise taxes. Although the rates vary by locale or state, everybody who buys that product or service in the place pays the same tax rate. This means that a rich person pays the same tax rate when they buy gasoline as the tax rate paid by a poor person for gasoline. Sales tax is calculated the same way no matter whether a person buys used toys at a thrift store or new toys at a high-end small business. In this way, regressive taxes are similar to proportional taxes because the tax rate is the same no matter how much money a person earns or has.
Proportional Tax System
A proportional tax is the second type of tax rate system to consider. It involves assessing the same tax rate on everyone. According to Investopedia, nine states in the United States apply it to income taxes. Those states are Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania and Utah. No matter how much money a person earns, they will pay the same tax rate. This type of a tax rate encourages people to both work more and spend more, because there are no penalties or higher taxes for doing so. A person who earns $50,000 a year in Michigan will pay the same state income tax rate as a person who earns $500,000 per year. The person earning more pays more in total. As such, this makes the proportional tax system similar to the progressive tax system, in which people who earn more pay a higher total amount of money in taxes compared to people who earn less.
Progressive Tax System
In a progressive tax rate system, the more money a person earns, the higher the tax rate they pay on that income. For federal income taxes, there are multiple tax rates. The income earned up to $9,525 has a 10 percent tax rate. The income from $9,526 to $38,700 is taxed at the rate of 12 percent, plus the 10 percent for the income up to the first $9,525. The tax rate is 22 percent for income of $38,701 to $82,500, plus the lower tax rates of 10 percent and 12 percent on the first $9,525 and $9,526 to $38,700. These graduated tax rates peak at 37 percent, which is the federal income tax rate for income earned above $500,001. The fact that more income equals more total tax paid makes it similar to the proportional tax.
The United States’ tax system is complicated and evolving. Rules change every year, and what is similar versus what is different between the three tax rate systems can change from year to year. Being able to answer, “How are the three tax rate systems similar?” is a key step in handling personal or business taxes.