Taxes are a defining feature of American life. From our grocery bills to our paychecks, taxes apply to most day-to-day financial transactions. However, it is essential that people know the different types of taxes, how they apply to common purchases, and how taxation affects overall wealth. Taxes apply to most forms of wealth and income, and most people should expect to pay funds toward Federal income tax, state and local income taxes, payroll taxes, and self-employment taxes at some point in their lives. Most forms of taxation fall into three categories: progressive taxes, flat or proportional taxes, and regressive taxes. Here’s what folks need to know.
Flat or Proportional Taxes
A flat tax is also called a proportional tax. In this type of taxation, the amount a person pays is proportional to the amount of income they earn. For example, under a flat tax, a person making $10,000 and a person making $100,000 might both pay 5% in taxes. As such, the person who makes $10,000 will pay $500, while the person who makes $100,000 will pay $5,000. Each person pays the same percentage of their income as tax.
Progressive taxes rely on the concept that the high an income, the higher the tax percentage. In other words, as taxable income increases, so does the tax rate. In the United States, this applies primarily to income tax, which is often calculated and deducted by a person’s employer. Progressive taxes apply to certain tax brackets. For example, in 2022, a person making around $40,000 should expect to pay an income tax rate of 22%. By contrast, a person making $85,525 should expect to pay an income tax rate of 24%.
A regressive tax is the opposite of a progressive tax. This type of tax relies on the idea that the more capital a person has that is subject to tax, the lower the average tax rate. Social Security is a great example of this type of tax. This payroll tax is deducted from a person’s overall pay. For the first $147,000 a person makes in 2022, they will pay a certain amount toward Social Security tax. But, if a person’s income exceeds this limit, they will pay a lower average rate on overall income tax.