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Income tax
• In modern economics, there are two main types of tax systems:
marginal tax rate and flat tax rate.
Taxes imposed on the earnings of organizations and
individuals are income taxes.
Earnings can come from diverse sources, including wages,
salaries, dividends, interest, royalties, rents, gambling
winnings, and product sales.
Flat tax rate
• For flat taxes, the rate does not change regardless of the
income. No matter how much a person makes, he or she will
be taxed at the same percentage.
• A flat tax imposes the same tax rate to all taxpayers, with no
deductions or exemptions allowed, but most flat tax systems
do not tax income from dividends, distributions, capital gains
and other investments.
• Supporters of flat taxes argue that this system is fair because it
taxes all individuals and businesses at the same rate, rather
than taking into account the levels of their income.
• And therefore, it gives an incentive to earn more and
eventually results in economic growth of country.
Marginal income tax
• Under a marginal tax payment system, individuals are taxed at
different percentages based upon their income levels.
There are clearly defined brackets for each level in this
type of system.
• It is imposes to the last amount earned.
If the person earning $10,000 gets $11,000 and then pays
$1,200 in taxes, the tax on the extra $1,000 is $200 and the
marginal rate is 20 percent. The average rate in this
example rises from 10 to 10.9 %.
• Marginal tax rate normally exceeds the flat tax.
• It is important to note, however, that the income is not all
taxed at one rate but at many rates as it moves across the
marginal tax rate schedule.
Taxable Income,
$
Marginal
Tax Rate
< 20 K 10 %
< 20 K – 40 K > 20 %
< 40 K – 60 K > 30 %
< 60 K -100 K > 40%
> 100 K 50 %
The above is a simple example of a marginal tax rate schedule. It
illustrates the rate at which various levels of income are taxed.
• As income rises, the taxed level goes higher.
If a taxpayer earns more money and moves into a higher
income level, marginal tax rates can significantly diminish
the benefit of the additional income because it will be
taxed at a higher rate.
• Some believe that marginal tax rates are harmful to the
economy because they discourage people from working harder
to earn more money.
• It is important to note that although earning more money may
increase income tax rate, a larger income will still be taxed at
more than one level.
Hall, Robert E., and Rabushka, Alvin. Hoover Institution Press Publication : Flat Tax (Updated Revised).
Stanford, US: Hoover Institution Press, 2007. ProQuest ebrary. Web. 30 May 2017.
Copyright © 2007. Hoover Institution Press. All rights reserved.

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Income tax

  • 1. Income tax • In modern economics, there are two main types of tax systems: marginal tax rate and flat tax rate. Taxes imposed on the earnings of organizations and individuals are income taxes. Earnings can come from diverse sources, including wages, salaries, dividends, interest, royalties, rents, gambling winnings, and product sales.
  • 2. Flat tax rate • For flat taxes, the rate does not change regardless of the income. No matter how much a person makes, he or she will be taxed at the same percentage. • A flat tax imposes the same tax rate to all taxpayers, with no deductions or exemptions allowed, but most flat tax systems do not tax income from dividends, distributions, capital gains and other investments. • Supporters of flat taxes argue that this system is fair because it taxes all individuals and businesses at the same rate, rather than taking into account the levels of their income. • And therefore, it gives an incentive to earn more and eventually results in economic growth of country.
  • 3. Marginal income tax • Under a marginal tax payment system, individuals are taxed at different percentages based upon their income levels. There are clearly defined brackets for each level in this type of system. • It is imposes to the last amount earned. If the person earning $10,000 gets $11,000 and then pays $1,200 in taxes, the tax on the extra $1,000 is $200 and the marginal rate is 20 percent. The average rate in this example rises from 10 to 10.9 %. • Marginal tax rate normally exceeds the flat tax.
  • 4. • It is important to note, however, that the income is not all taxed at one rate but at many rates as it moves across the marginal tax rate schedule. Taxable Income, $ Marginal Tax Rate < 20 K 10 % < 20 K – 40 K > 20 % < 40 K – 60 K > 30 % < 60 K -100 K > 40% > 100 K 50 % The above is a simple example of a marginal tax rate schedule. It illustrates the rate at which various levels of income are taxed.
  • 5. • As income rises, the taxed level goes higher. If a taxpayer earns more money and moves into a higher income level, marginal tax rates can significantly diminish the benefit of the additional income because it will be taxed at a higher rate. • Some believe that marginal tax rates are harmful to the economy because they discourage people from working harder to earn more money. • It is important to note that although earning more money may increase income tax rate, a larger income will still be taxed at more than one level.
  • 6. Hall, Robert E., and Rabushka, Alvin. Hoover Institution Press Publication : Flat Tax (Updated Revised). Stanford, US: Hoover Institution Press, 2007. ProQuest ebrary. Web. 30 May 2017. Copyright © 2007. Hoover Institution Press. All rights reserved.