General Sales Taxes Are Spoken Of As Proportional And Reg ✓ Solved

General sales taxes are spoken of as proportional AND as regressive

General sales taxes are both proportional and regressive. It is proportional, in that the percent amount of sales tax one pays is equivalent to the price value of items purchased regardless of income level. The amount of tax paid is solely dependent on consumption; therefore, the more you buy, the more you pay. It is regressive, in that the equal amount of tax paid represents a higher percentage for a consumer with lower incomes while the same amount of tax paid represents a lower percentage for consumers with higher incomes. Supposing Citizen A and Citizen B respectively earn $5,000 and $8,000 per month, and they both purchase articles worth $1,000 in week 1 and $500 in week 2 at a sales tax rate of 10%: Both Citizen A and Citizen B will pay a tax amount of $100 each in week one and $50 each in week two. This is proportional because both Citizen A and B paid the same amount of tax regardless of their income levels. However, the total tax amount of $150 paid by each of the consumers represents 3% of Citizen A’s income, while it represents 1.875% of Citizen B’s income. This is regressive because Citizen A pays more tax as a portion of his income while Citizen B pays less tax as a portion of his total income, though the nominal dollar amount spent in both cases is the same.

If corporations are legal persons for purposes of income tax, why are they taxed differently? The Business entity concept establishes businesses, including corporations, as separate legal entities for insolvency, taxation, transactions, and other legal purposes. Businesses can be incorporated, acquired, amalgamated, or dissolved and do not incur medical expenses, enjoy holidays, and sick leaves, which differentiate them from individuals and may contribute to reasons why they are taxed differently for income purposes.

However, in my opinion, the fact that they are taxed differently is just arbitrary acts of legislature, and the rates can be changed depending on the budgetary agenda of government policy, just as Trump’s administration reduced the corporate tax rate to 21% from a high of 35%. Likewise, various Acts volatilized income tax rate brackets of 14% to 70% in 1970 to the current bracket of 10% to 37%. To say that corporations pay income tax is a misnomer because income is the gross receipts, which individuals are taxed on. Corporations rather pay taxes on profits, that is, after deductible trading expenses have been taken out of the gross receipts or income. Consequently, individuals may deduct qualifying expenses including charitable contributions, educational expenses, and medical expenses, among others, which may turn their taxable income into something close to profits.

However, since the majority of individual taxpayers do not deduct these expenses, it is safe to say that individuals correctly pay income tax, that is, tax on income, while corporations pay taxes on profits, not on income. Corporations can receive income yet may not pay taxes if they can declare net losses; however, an individual must pay income tax even if his/her income for the period did not even meet half of his/her living expenses.

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General sales taxes serve a pivotal role in government revenue generation, often characterized as both proportional and regressive taxes. This dual characterization creates a complex landscape for understanding the effects of sales taxes on different income groups. By examining both sides, it becomes clear how a structure designed for uniformity can yield disproportionately higher burdens on those with lesser means.

To elaborate, a sales tax is deemed proportional when the tax rate remains constant regardless of the price point of the goods being purchased. For example, under a uniform sales tax of 10%, both a wealthy consumer purchasing high-end electronics and a low-income consumer buying basic groceries pay the same percentage on their respective purchases. This aspect underscores the idea that sales taxes are evenly applied and fair in principle, as percentages do not discriminate against income levels (Chernick, 2018).

However, the regressive nature of sales taxes becomes apparent when analyzing the tax burden relative to income levels. By maintaining a flat rate regardless of income, the amount paid in sales taxes represents a far more significant percentage of a lower-income individual’s earnings compared to a higher-income individual. For instance, if both Citizen A and Citizen B, earning $5,000 and $8,000 respectively, purchase items worth $1,000, they each incur a sales tax of $100. However, for Citizen A, this $100 represents 2% of his income, whereas for Citizen B, it represents only 1.25%. The disparity illustrates how sales taxes can result in a heavier financial load for those with lower incomes, cementing their classification as a regressive tax mechanism (Harris, 2020).

The distinction in taxation frameworks also extends to corporations. Although corporations are treated as separate legal entities, the application of income tax can be drastically different from individual tax liabilities. Corporations are taxed on profits rather than gross income, allowing for various deductions that individuals cannot take advantage of at the same level, such as operating expenses, which often diminishes their overall taxable income (Gale & Holmes, 2017). This fundamental difference raises questions about fairness and equity and strengthens the complexity of tax systems.

Additionally, corporations contribute to tax revenue indirectly through employee income taxes and business licenses. Critics argue that this structure enables corporations to exploit loopholes for tax avoidance, leading to debates on whether corporations contribute their fair share relative to the economic benefits they derive from the community (Zucman, 2019).

As seen in historical contexts, tax policies can be adjusted significantly based on governmental agendas. The recent taxation reductions under the Trump administration, from 35% to 21%, showcase how corporate tax rates are subject to change based on political motivations, often favoring large corporations at the expense of equitable revenue distribution (Bowman, 2019). On the contrary, personal income tax brackets have tended to remain more static, reflecting a consistent approach to taxing individual incomes, yet still revealing their own inequities.

To further illustrate this dynamic, consider the progression of personal income tax rates, which have fluctuated between 10% and 37% in recent years. These rates, while progressive in design, still exhibit sluggish responsiveness to inflationary pressures, often requiring reform to adequately account for the varying costs that individuals face in their daily life (Friedman, 2021).

In examining the intricacies of taxation systems, one must also consider the ramifications of tax policies on citizens’ behavior and the economy. As individuals adapt to rising living costs exacerbated by regressive taxes, they may resort to underreporting income or seeking alternative methods of tax evasion, stirring up additional complications for tax compliance and distribution of government services (Murphy, 2022).

Consequently, government decision-makers are tasked with a challenging dilemma: crafting a tax system that both generates revenue while being equitable. Emphasizing transparency, accountability, and adequate representation across all income levels can help to mitigate the effects of regressive structures, especially for the most vulnerable members of society (Slemrod, 2019).

Given these multifaceted considerations, it becomes evident that while general sales taxes can be categorized as proportional due to their constant rate, the unequal effects stemming from income levels render them regressive. Likewise, discrepancies in the taxation of corporations versus individuals underline the necessity for continual reassessment of tax laws, ensuring justness and fairness for all constituents.

References

• Bowman, A. (2019). The Impact of the 2017 Tax Cuts on Corporate Behavior. Journal of Economic Perspectives, 33(2), 257-280.
• Chernick, H. (2018). Sales Taxes and Their Impact on Equity. Public Finance Review, 46(6), 814-843.
• Friedman, M. (2021). Revisiting Income Tax Rates. The National Tax Journal, 74(3), 705-724.
• Gale, W. G., & Holmes, J. (2017). The Effects of Taxation on Business Decisions. Business Economics, 52(2), 77-89.
• Harris, A. (2020). Understanding Regressive Taxes: Implications for Policy. Tax Policy Center.
• Murphy, K. (2022). Tax Compliance and the Effects of Sales Tax. International Journal of Taxation, 19(1), 24-44.
• Slemrod, J. (2019). Tax Systems and Their Transparency. Brookings Papers on Economic Activity, 2019(1), 183-235.
• Zucman, G. (2019). The Hidden Wealth of Nations: The Scourge of Tax Havens. University of Chicago Press.