Understanding Taxes - Theme 3: Fairness in Taxes (2024)

FAQs

Understanding Taxes - Theme 3: Fairness in Taxes? ›

A concept of tax fairness that states that people with different amounts of wealth or different amounts of income should pay tax at different rates. Wealth includes assets such as houses, cars, stocks, bonds, and savings accounts. Income includes wages, interest and dividends, and other payments.

A fair tax is a tax that's equitable for each taxpayer. This means a lower income earner should pay a tax proportionate to their income. An unfair tax would be when low-income earners pay the same tax as those in a much higher tax bracket. This means they spend more.

Two criterion used to measure fairness in taxes are benefits received and ability to pay. According to the benefits received principle, those who receive or benefit from public services should pay for them. People who use a toll road should pay the toll.

The answers matter because various combinations of tax bases and rates can raise the same amount of revenue. Three long-standing criteria—equity; economic efficiency; and a combination of simplicity, transparency, and administrability—are typically used to evaluate tax policy.

The term fair tax was coined in 1994 by the founders of the Americans for Fair Taxation who proposed replacing the U.S. income tax with the consumption tax, much like a state sales tax.

Citizens for Tax Justice (CTJ) is a Washington, D.C.-based think tank and advocacy group founded in 1979 focusing on tax policies and their impact.

Supporters of the progressive system claim that higher salaries enable affluent people to pay higher taxes and that this is the fairest system because it lessens the tax burden of the poor.

Also known as the fairness principle, Equity and Fairness states that similarly placed taxpayers must be taxed the same amount. Horizontal equity is important in this principle, which means that taxpayers with equal “ability to pay” should pay the same amount of tax.

progressive tax—A tax that takes a larger percentage of income from high-income groups than from low-income groups. proportional tax—A tax that takes the same percentage of income from all income groups. regressive tax—A tax that takes a larger percentage of income from low-income groups than from high-income groups.

Horizontal equity holds that those who are in all relevant respects identical should be treated the same. Each of these concepts is less straightforward than it may seem.

What are two principles of taxation? ›

These are: (1) the belief that taxes should be based on the individual's ability to pay, known as the ability-to-pay principle, and (2) the benefit principle, the idea that there should be some equivalence between what the individual pays and the benefits he subsequently receives from governmental activities.

California's state and local governments rely on three main taxes. The personal income tax is the state's main revenue source, the property tax is the major local tax, and the state and local governments both receive revenue from the sales and use tax.

Simplicity- What makes taxes more tolerable to many people? Efficiency- What are two criteria for making a tax efficient? Taxes are easy to administer and the government is able to generate revenue.

Benefits of a Fair Tax System

The Fair Tax could reduce the federal tax burden for individuals whose spending is significantly lower than their earnings. Investment growth and earnings would compound tax-free, which may encourage saving and investing.

Progressive taxes take more from those able to pay more. Because this method is based on the ability to pay, it is considered the fairest means of taxation.

Sales taxes tend to be regressive because they take a larger percentage of the income of low-income taxpayers.

The fair market value is the price at which a property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. It's widely used in many financial arenas, especially in tax matters and real estate deals.

The tax incidence on the consumers is given by the difference between the price paid, ‍ , and the initial equilibrium price, ‍ . The tax incidence on the sellers is given by the difference between the initial equilibrium price, ‍ , and the price they receive after the tax is introduced, ‍ .

The Fair Tax Act would impose a 30 percent national sales tax. Beginning in 2025, H.R. 25 would impose $30 in tax on each $100 purchase. ** Proponents call this a “23 percent tax” because the $30 tax payment is 23 percent of the tax-inclusive price of $130.