Tax "Fairness"

When taxes are discussed, much of the debate centers on tax “fairness.” How much should an individual or corporation be required to pay in taxes? Should wealthy people be required to pay a higher percentage of their income than those who are less well-off? Should the government redistribute income by taxing the rich and giving some of that money to the poor? None of these are easily answered questions, but they must be addressed and answered — at least tentatively — when the federal government establishes their taxation policies each year.

Some people believe a tax is fair when it is progressive, in other words, tax rates increase as income increases. For example, under a progressive tax system, an individual who earns $20,000 a year would be taxed at a lower rate than would an individual who earns $100,000 a year. Others believe that fairness means tax rates are “flat” or proportional, that is, all individuals are required to pay the same percentage of their incomes, regardless of how much they earn each year. Over the past several years many politicians have called for a flat, or at least “flatter,” tax system in the United States.

While most Americans support either a progressive or proportional tax system, few if any are explicitly in favor of a regressive tax system (where individuals with lower incomes are taxed at higher rates than wealthier individuals).

There are, though, examples of such taxes in the American system. Local taxes on food, for example, tend to be regressive. Given a sales tax on food of 5 percent and an income of $30,000, a family that spends $4,000 a year on food would pay $200 in food taxes a year, or 0.7 percent of its annual income. Comparatively, a wealthier family with an annual income of $150,000 that spent $8,000 a year on food would pay $400 in food taxes, or 0.3 percent of its annual income. The wealthier family is effectively taxed at less than half the rate of the lower-income family. Many states that collect taxes on food offer tax credits or rebates to low-income families to mitigate the regressive nature of such taxes. Another example of a regressive tax in the United States is the payroll tax (FICA), because no social security taxes are assessed on income over $102,000..