Micro Unit 6.5 CW: Types of Taxes and Principles (MS)
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Ability to Pay Principle: The idea that people with the ability to pay more should pay a higher percentage of their income was espoused (to express support) by none other than Adam Smith. In the field of modern Public Finance, the Ability to pay theory presented by an English economist- Arthur Cecil Pigou (1877 –1959) is considered to be one of the Influential theories.
Benefit Principle: The benefit principle is a concept in the theory of taxation from public finance. In its use for assessing the efficiency of taxes and appraising fiscal policy, the benefit approach was initially developed by two Swedish economists- Johan Gustaf Knut Wicksell (1851 –1926) and Erik Lindahl (1891 –1960).The principle bases taxes to pay for public-goods expenditures on a politically-revealed willingness to pay for benefits received
Question 1
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The benefits-received principle of taxation is used to support corporate and personal income taxes.
The benefits-received principle of taxation supports the use of progressive taxation.
Sales tax are proportional because the same tax rate applies regardless of the size of the purchase.
Sales tax is regressive because it takes up a larger percentage of income for lower income earners and higher percentage of income for higher income earners. A proportional tax is a tax that requires the same percentage of everyone's income.
If you pay $1,000 tax on $10,000 of taxable income and a $3,000 tax on a taxable income of $16,000, the tax is progressive.
A truly progressive tax takes more from the rich than it does from the poor.
Although state and local taxes are highly progressive, Federal taxation is predominantly regressive.