A Tax by Any Other Name

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Quick quiz: Is the current US income tax system progressive or regressive?

Do you know? Do you care? Maybe you believe a tax is a tax and, as Ben Franklin remarked, “Nothing can be said to be certain, except death and taxes.”

But there are differences between a progressive tax system and a regressive one.

In a regressive system you’re taxed at the same rate as everyone else, no matter your level of taxable income. For example, a 10 percent rate would apply equally to you and the millionaire next door, even if the millionaire can more easily afford to pay. The flat tax talked about by campaigning politicians is an example of a regressive system. So are sales taxes and value-added taxes, which taxes goods during the production process.

On the other hand, in a progressive system the tax rate increases along with your income level. If you earn less than the millionaire next door, you pay a lower rate. This, as you may already know, is the type of tax system currently in place in the US.

But a progressive structure has drawbacks. For instance, too-high tax rates can play havoc with the economy. When taxes are excessive, there’s less money to spend on capital investment. Capital investment helps create jobs, which generate income. So lower spending on capital investment means fewer jobs, less income, and a reduction in taxes collected. That ripple effect is one reason the term “economic recovery” is included in the title of so many tax laws.

Of course, the very fact that there are so many tax laws is another problem with the current system. Every time Congress tries to fine-tune the law, it grows more complex. Flat tax and sales tax systems might have a simpler structure.

Progressive or regressive? Neither system is perfect. Even Ben Franklin might agree there’s another certainty: The quest for a tax code that’s simple, efficient and fair is far from over.

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