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What Are The Different Types of Tax Paid To The Government in The U.S?

by Kashif Ur Rehman
What Are The Different Types of Tax Paid To The Government in The U.S?

While the American tax system seems complex to some individuals, we can break them down into three categories; proportional, regressive and progressive. However, if paying taxes seems like a daunting task to you, engaging professional help from a financial advisor might be the solution to your problem.

To put all the three major tax categories into perspective, they simply represent the taxes you pay on goods and services, the taxes you pay on property, and the tax levied on your income.

Furthermore, the government does aid its citizens with the tax that's expected to get paid through a mechanism known as a tax credit. This is simply the amount of money you can subtract from the taxes you owe the government. Therefore, you get to save more from your taxable income while paying less in taxes.

The three major taxing categories include;

Proportional Taxes

Proportional taxes affect all individuals equally regardless of whether they are low, middle or high-income earners. Everybody pays the same percentage rate/amount of tax.

The nine states using this tax system include; Illinois, Michigan, Massachusetts, Colorado, Pennsylvania, Indiana, North Carolina, Utah, and Kentucky.

Other taxes included in this system are occupational taxes, receipts taxes, and per capita taxes.

The system aims to ensure equality within the average tax rates paid by individuals from different societal classes. Also known as a flat tax system, this model is meant to encourage citizens to work harder since there is no getting penalized for earning more.

In fact, the states believe businesses are more likely to invest more of their services in the community, increasing the circulation of currencies that boost the economy.

Regressive Taxes

Regressive taxes affect the low-income earners more than high-income earners in the country.

The government levies tax as a percentage of the value of an asset an individual acquires. 

These taxes are included in products and goods we purchase daily.

Regressive taxes do not correlate with one's earnings, so the rich get to pay the same amount as the low-income earners, which means they are more likely to afford the tax levied by the government and feel minimal to no dent in their income as compared to the latter group.

Progressive Taxes

Progressive taxes affect the high-income earners more than the low-income earners. Taxes under this system result from an individual's earnings.

An increase in income means or is directly proportional to an increase in the percentage of tax levied on the same income.

The federal income tax is an example of a progressive tax since the percentages increase in intervals, and the more an individual earns, the higher the category of their taxable income.

Some people support this taxation model, while others are strongly against it, claiming that it creates inequality in society by taxing more to the wealthy in a country that favors low-income earners.

Examples of Proportional, Regressive and Progressive Taxes

To further simplify all the three major tax categories, here are some examples for better understanding.

1. Proportional Tax

For instance, if a country taxes a 10% proportional tax on income, that means that for every $100 of an individual's taxable income, $10 qualifies as that individual's tax charged.

And so, if someone earned a taxable income of $1500 in the year 2021, they ought to have paid $150 in taxes to the government (10% of $1500). And if someone earned a taxable income of $2500 in the same year, they should have paid $250 in taxes to the government (10% of $2500). And so on.

As earlier mentioned, everybody gets taxed at the same percentage rate without considering their level of income or wealth. Whether you make more money than your neighbor, you'll pay equal percentages in tax.

2. Regressive Tax

Let's say you wanted to apply for a driving license now that you've undergone training in a reputable driving school and excelled in all your internal exams. The fees levied by the government to acquire such crucial services are higher for low-income earners than high-income earners.

A $35 fee for acquiring a license might be a higher percentage for someone making $600 a month than someone making $60,000 a month.

Regressive taxes remain the same across the board, but low-income earners feel more dent in their purchasing power.

3. Progressive Tax

If a person is making, let's say, $80,000 a month, their tax liability increases with their income.

Let's assume for the first $10,000 a 10% tax gets levied, for the second $10,000 a 15% tax gets levied, for the third $10,000, a 20% tax gets levied, for the fourth $10,000, a 25% tax gets levied, for the fifth $10,000, a 30% tax gets levied, and for the excess of $20,000, a 35% tax gets levied.

The total liability for such an individual would be ($1000+$1500+$2000+$2500+$3000+$8000) = $18000. Furthermore, any amount exceeding 50,000 gets taxed at a flat rate of 35%.