ECNU 202 Principles of Microeconomics
February 11, 2015
This paper is to discuss Proportional tax one of three types of taxation systems the government could use to raise revenues. This type of taxation‘s effect on the lower, middle, and high income taxpayers according to the link between income and the tax rate. (Miller, 2014) Review the differences between a proportional, progressive and regressive tax system and how each affect taxpayers.
A proportional tax also referred to as flat tax requires that all taxpayers pay the same amount of taxes on their income by a set percentage. The ideal of a proportional tax has for decades been debated and proposed as a revised system on income tax with no exceptions or proposed with allowing for certain adjustment and deductions also proposed as a flat tax on consumption. A flat rate tax that could be considered a type of proportional tax would be the sales tax. Sales tax is a tax paid by all consumers regardless of their income. (IRS, 2014) The example Miller uses for the proportional rule that runs the market system gives is a clear visual picture of the principles of proportional taxation. “if 10 percent of the “dollar votes” are cast for blue cars, 10 percent of automobile output will be blue cars.” (Miller, 2014, p. 115) This is opposite of a progressive tax where lower- income taxpayers pay lower tax rates than taxpayers making a higher income as well as the regressive tax where when taxable income increases there is a smaller percentage of taxable income taken. (Miller, 2014) Although all three taxes affect taxpayers differently and garners revenue from different sources the taxes are used by the government for common resources, government programs and other government activities just the same. Supporters believe that this is the fairest tax system of the three and that without having to pay higher taxes people would be motivated to earn more money thereby increasing the revenue for the government. They also believe that it would be more cost-effective featuring government spending and with this simplification it would not only make it easier for the internal revenue system to collect taxes but, would also be easier and less costly for everyone to keep track and prepare forms for taxes. (Staff, 2005) Opposition to the proportional taxation claims that those in the lower- income bracket would carry a greater burden of the taxes because a smaller percentage of taxable income taken in tax when taxable income increases (Miller, 2014 pg. 125). That it would be actually more