Income Tax 2021 2022 tax types and categories, get ready to get refunds to the max diving into income tax 2021 2022 categories or types of taxation. These are terms you’ll often hear thrown around or disgust in debates about different tax laws.
When people are thinking about whether they agree or disagree with a particular tax law. They include flat or proportional tax, progressive tax and a regressive tax.
So these are often kind of catchphrases that you will hear in a debate when people are trying to express support or non support for a particular law.
So for example, if they disagree with the tax law, they will typically call it some form of regressive tax, if they agree with it, they might call it say a progressive tax, because it sounds so nice, it’s a progressive tax.
But often these kinds of terms are going to be thrown around without too much nuance once again, and usually they will be thrown around to support someone’s particular viewpoint, possibly a particular viewpoint that actually benefits them in some way, the reality of the tax law in general, really being more complex than that.
So I would propose that what we want to do is first think about these definitions in their purest sense, and then see how well they apply to a particular tax law, noting that most tax laws are more complex, and that we won’t be able to put a rigid definition and put the different types of taxes directly into, say, a flat tax group, a progressive tax group,
a regressive tax group, because what we need to do is basically accept the fact that we’re going to have the necessary evil of taxation. And then we need to be comparing and contrasting the different taxes.
And we’ll end up using terms if we’re looking at it in a more fair and nuanced type of way with terms such as that tax is a flatter type of tax than another type of tax, or that tax is more progressive or less progressive than the prior tax law, or this law is more regressive, or less regressive than a tax law.
Obviously, in debates, when people are trying to disparage a certain tax, if they’re against the tax law, they’re gonna say, that’s a regressive tax is just in this bucket of regressive tax.
But obviously, the real question is, well, if we don’t have that tax, you’re comparing it to the prior tax, is it more or less regressive than the prior tax? Right?
That tax is more progressive? Well, what does that mean, in relation to the alternative type of taxation that you’re proposing here, and that’s going to be the more nuanced view that you kind of got to look at when you’re actually looking at the policy.
So a flat tax, in its purest sense would be that there’s just going to be one rate. So if you will apply that to an income tax, for example, then you have to have someone that pays, if they earn more income,
they’re going to pay more tax, because if they earn less income, and you have a 10% tax rate, for example, they’re going to take 10% of the taxes, if they earn more income, then they’re going to take 10% of the higher number, and they’re going to be paying more taxes, the benefit of a flat tax is that it’s really easy to do.
And the fact that it’s really easy to do, allows businesses to have more security, and be able to basically calculate into the future a lot more confidently with it with a simple flat tax type of system.
A progressive tax is a system that where the act, and this is where the tax code is at. So the in our income tax is a form of progressive tax.
But you can’t just call it a progressive tax, because you can always make something more or less progressive, all you would do is add more tables into the system.
And when you add more tables, what you’re doing is you’re increasing the complexity, which could have negative impacts on decision makers trying to make decisions out into the future.
Versus versus basically, the idea that you’re going to tax more at the higher end. So again, if you’re arguing on the progressive tax, then of course, you’re saying it’s not enough that you have people that are earning more pain more,
just because they’re paying the same rate, we want the rate to actually be increasing as the income increases.
And again, that’s a you can that’s a fair argument to make. But we want to basically make sure that we put it in context of well, how progressive is it? And how many layers do we need within the within the progressive structure? And how much does that basically,
possibly hinder people’s decision making capability as business people are trying to make projections, you know, out into the future, obviously, as taxes go up, then there becomes kind of a disincentive to earn more revenue after a certain point. So these are kind of debates between these two.
So you’ll end up using terms like this tax is flatter, which you could say our progressive tax system, which is an income tax system would be flatter, be flattened.
If we took away some of the layers and we just had fewer layers, there would still be a progressive tax with multiple layers, but it would be flatter than otherwise was.
Or you could say that it would be less progressive meaning having less layers than otherwise would. Now obviously, the terms are a little bit deceiving as well, because the idea of something being progressive plussing up is sounds a lot more beneficial than possibly a flat tax, which sounds kind of neutral.
And obviously, the term regressive tax sounds negative, it sounds like you’re going backwards and no one wants to go backwards. And the idea of a regressive tax would be a tax that’s going to fall more heavily on people that make less income, that people that are less well off.
So if someone if someone has a tax proposal, and someone else is against it, what they want to do is put it in the bucket of regressive your tax is regressive. And that’s going to basically say, well, you’re just trying to benefit, you know, rich people, which is what the idea of the of that would be.
And again, the question is, well, how regressive visit it mean, is it more or less regressive than the alternative, whatever the other tax proposal will be.
So a flat tax, this is an example of how you can think of something as kind of flat to a degree, but the law isn’t exactly completely a flat tax. So most of the time, most laws will not fit just perfectly into one of these kinds of buckets, and one term that can be used to it.
So for example, the tax rate remains the same overtime. So a pure flat tax would be like, I’m going to just charge 10%, whatever for your income tax. And no matter what you earn, I’m just going to take 10% of it.
And obviously, as you earn more that 10% is going to result in more money that we’re taking from you, because you have higher earnings. This Social Security tax is kind of a form of flat tax, but it has a cap on it. So you can see it has a flat tax components.
But then, but then it caps off. So that means it’s going to have some different components than you would typically think of as a normal flat tax.
So for example, on your payroll taxes, when you get taxed on payroll, and you look at your W two, the employee side of it is usually generally 6.2%. And it is and it is what it is up to a certain point or level of income.
So if I took the 40,000 times the point oh, six, two, I would get the 2004 80. And if you made 100,000, we would multiply that times the 100,000 times the point oh, six, two, and we would get the 6200. So obviously, the person that’s earning 100,000, in this scenario, is paying more than the person owing that earned the 40,000.
Dude, even though they have the same rate, we don’t have a progressive rate, the rate didn’t go up, we’ve got the same rate that is being applied. However, there’s a cap on on the Social Security.
So even though this is a simplified tax, the benefit of that is payroll taxes to that degree are actually a little bit easier. Because you can easily calculate the payroll tax, we don’t have to say,
Okay, well, what is your earnings going to be through the end of the year after a year’s worth of earnings, because I have to multiply your tax rate as if it was earning for the entire year, even though I’m only talking about earnings that are in the first week or something like that, it’s a lot easier to do the flat tax calculation. However, there’s a cap on it.
And that means that people that make over a certain amount are not going to be paying into that cap. And I don’t want to get into a lot of details on that. But if you’re if you’re trying to think about why that isn’t, in terms of the Social Security, the general idea would be that we’re not really sure.
And the United States, whether social security should be like more of a benefit program, or basically a federal kind of retirement program, we’ve been kind of debating that type of system. So is it a safety net program to help people out if they if they haven’t, weren’t able to save during their lifetime?
Or is it something that you’re paying into, and you should get a benefit, more like a retirement type of program, if it’s a retirement type of program, then you would think as your income goes up, you would get a benefit from it in terms of your of your benefit calculation, at the point in time of when you’re going to be receiving the Social Security benefit after your working life is over at that point.
But after your income goes above a certain level, there’s you’re paying a lot of money into the Social Security, but it’s not going into any calculation generally, for the benefits that you’re going to be getting.
So that’s kind of the idea of why there would be you know, a cap added at some point in time. So you could debate that is that is that good or bad? What should just Social Security be?
But, you know, you can see it’s a little bit more confusing than just for it’s just a flat tax. But you can also see the benefit of the flat tax in it. It’s easy to calculate. And if you’re a business owner,
and you’re trying to figure out you know how much you’re going to pay someone and what your Social Security is, and, and so on. So a lot easier to do. Our progressive tax is the is the system for example, our income tax system is a progressive tax system.
That means you when you calculate the tax, you’re going to have this table. That’s going to be actually the calculation of the tax.
Now most people if you were to If you were to ask them, What a progressive tax system, they probably couldn’t tell you even that much, they would just say, well, the tax rate goes up maybe as as your income goes up. But it’s a little, it’s a lot more nuanced than that.
And they certainly most likely wouldn’t be able to actually calculate or describe how the tax rate is going to be calculated. That’s the problem. Because and you might say, well, that’s not a problem, because you just all you get is tax software, and you figure that out.
And you could do that. But the, there’s still kind of a problem with projections business owners are trying to think about, and people that are working, and so on, and budget and whatnot, are trying to think about how much tax they’re going to owe.
And and if they owe the first $1,000, when you earn your first $1,000 In the year, you can’t just multiply it times a flat tax or a flat rate, or any rate, right, because you don’t know what your tax rates going to be until your earnings are complete at the end of the year.
So it’s really it really does kind of make it a lot more complex, to project out into the future to make decisions out into into the future, because your taxes will be a whole lot different based on your income level.
And you don’t really know what they are until the end of the year. So the general idea of it would be that you got you’ve got your first tax rate is going to be taxed at zero to 9009 50. Here.
And so that would be we’re going to say the 10% tax rate, and then we’re going to move up. So when people say if I earn any more money, I’m going to go up to the next tax bracket.
Now that doesn’t mean if you go up to the next tax bracket, this is a misconception as well, that that is that is possibly used to unfairly downgrade the progressive tax system saying,
well, that doesn’t make any sense. Because as I go up to 12%, or as I go up to 37%, all the way down here, why would I work at all at 37%? Because because now my tax rate is higher enough that it’s a disincentive to work? Well, you’re not getting taxed 37% on the entire thing,
you’re only getting taxed 37% on the dollar amount that’s over that threshold. So there is a disincentive for people to work as the tax rate goes up. But but that disincentive kind of caps out, you still have this, you know, the same more incentive at the lower tax rate.
And so people might say, I’m not going to earn that next dollar, because you took more money from me,
I’m not going to earn the next dollar over above that, because it’s no longer worth it. That’s kind of a danger when taxes get get too high. And you can clearly see that because obviously, if the government took 100% of your revenue, would you work?
No, you wouldn’t you wouldn’t work, right. So if you looked at the curve, basically for taxation, the taxes as the tax rate goes up, government revenue goes up, right. But at some point, when the tax rate goes up,
it’s gonna go back down, the revenues actually going to go back down, because we know that way down here, if they taxed 100%, then no one would work, right, there would be no incentive to work because they would just take you just they would just take all everything that you earned.
So the question is that you would think there’s a curve so that there’s a question of, well, how much revenue? How much more revenue is the government picking up or taking in as they increase?
You know, the tax rates. So that’s going to be, you know, one of the questions. So if we go from if we go from the 10%. Notice, if I take 10% of the 9009 50, then this table over here, saying, if you’re in the 12% tax bracket, we’re just going to take the 9009 50 plus 12% of the amount over 9009 50.
Why? Because we taxed the first 9009 50 at 10%, which is 995 about and then the difference between what you earned if you’re within this bracket, some number below 40,500, is what you are then going to be paying 12% on and then if you go down to the next tier, you have got the 22% bracket.
So that means that if you made over 40,005 26, then the amount of the 40,005 26 is now being taxed at 10%, and then at 12%, up to the 40,005 26.
And then the difference between the 40,005 26. And where your income is, is going to be taxed at the 24%. So they can simplify that by basically saying we’re gonna take 4000 664, which is about the 10% and the 12% portion, and then you have to calculate the 22% of the amount over the 40,005 25 and so on and so forth.
If we go on to the next 186 376 is the amount that includes this 14 751 includes the three brackets, the 10, the 12 and the 22.
And then you have to calculate the rest of your income based on the higher bracket of 24. And then if you go up to here, the 164 969 26 is calculated based on 2420 To 12, and, and 10, and so on.
And notice, if you if you make, you know a lot of money, you’re being taxed at multiple brackets. So if you were to actually calculate this, like in Excel, it would be kind of a complex calculation. Again, the computer basically does this. Now, if you have tax software, and you’re actually doing the taxes,
it’s not as big a problem, when you’re actually doing the taxes, because the software is going to do it for you, and you’ll just basically calculate it out. But when you’re projecting out into the future, that’s when it’s going to be kind of more of an issue.
And when you’re talking to people about their tax rate, then you’ve got, you’ve got an issue of like, well, this is your highest tax bracket. But you also can think about your average tax rate.
And you can, and you also have to think about your average tax rate on taxable income, as opposed to your actual income before deductions and before, you know, credits and so on, that are going to be involved as well.
So it becomes, you know, somewhat complex to actually know how much tax you’re paying with it with a as the tax brackets become more complex. Now, you could propose tax laws and start to say, okay, would it be beneficial, say,
for us to have instead of 1234567 tiers to only have maybe three tiers? And have it that would be less progressive, or more flat?
Or would it be better for us to have more tiers in here, and that would basically make it more progressive and less flat? So really, what you’re talking about oftentimes is,
is it more or less of a flat, or progressive tax, now a regressive tax is usually going to be something that’s going to be something that people will use, when they’re trying to talk down the tax, the tax rate decreases as wage base increases. In other words, the tax falls more heavily on people that are have lower income, it’s going to fall more heavily on people have lower income, so it’s gonna be regressive.
And people are gonna say, well, that’s obviously not fair, you don’t want it to be regressive. If people are making more income, then they should be paying more taxes, it shouldn’t be going the other way around.
So tax resulting in a larger percent taking from low income earners is another way that you can think about that. And a category that people often bring up is going to be sales tax.
Now, again, the problem is with this is, is that that’s not really fair to just apply it out to complete sales tax, because the tax code is usually more complex than just to say, well, that tax is regressive. And again, you’ll note that when people don’t like a particular tax, what they’re gonna do is they’re gonna say, well, that’s a regressive tax,
I have categorized it into this bucket, and now and now you can’t touch it anymore, because it’s got cooties, or something like that, right. But the really, the question is, Is it is it more regressive or less regressive than the alternative?
So in other words, if you think about a sales tax, the reason in its classical form, you would think it’d be regressive, is because if you earn all your money, if all your money that you’re earning, goes to buying the necessities, food, gas, clothes, and so on, then you’re paying all of your all of your money is being taxed, right. But if you are earning more than you need to spend,
if you’re saving some of your money, then you’re not spending all of your money, only a portion of your money is being subject to the sales tax, and therefore the sales tax will generally incentivize savings.
So sales tax is usually something that’s going to incentivize savings, whereas an income tax will often possibly incentivize more on the spending side of things.
And that and that is true on the sales tax, right? If you were to say there’s a flat sales tax on everything that you purchase, we’re going to apply a sales tax, when you buy something, we apply whatever 10% sales tax on it, and you pay 10%
No matter what you buy. And that would mean that people that have to spend all their money to buy bread, are going to be paying more then people that that don’t have to spend all their money, it can save some of their money and not have to pay money on the sales tax. However, you can easily change that by just saying,
Well, what if we just say we’re not going to charge sales tax on some of the necessities, we’re not going to charge sales tax on bread, we’re not going to so to charge sales tax on groceries, we’re not going to charge sales tax on food,
possibly gas, and utilities and so on electric, that’s the stuff that people spend, that are in the lower income, spend all their money on. And therefore if there’s no sales tax on those things.
Now, the sales tax no longer falls on the low income earners, it falls on the higher income earners who are using their money to purchase stuff. And it falls on earners who are more are buying things that are more extravagant, like your yacht is going to cost you a lot of sales tax, if you’re subject to the sales tax.
So you can see again, these kinds of laws, people often see these laws and they say, Well, as soon as they hear something like well, it’s a sales tax, that’s regressive.
I won’t tell you, you know, it’s, that’s it’s been put in the category. I know that and so and so they never look at anything a little bit more nuanced than that. So really, these kinds of terms you got to you got to look at them and say, Okay, who was the person saying what the what the term is?
Do they have any incentive on on why they would be in a proponent or not liking this tax, and then basically compare what they’re saying about the tax to the alternative, because we know there’s going to be a necessary evil of taxes. The question is, is this tax relatively better than the alternative?