 Income tax 2021-2022, tax types and categories. Get ready to get refunds to the max, diving into income tax 2021-2022. Categories or types of taxation. These are terms you'll often hear thrown around or discussed in debates about different tax laws when people are thinking about whether they agree or disagree with a particular tax law. They include flat or proportional tax, progressive tax and a regressive tax. So these are often kind of catchphrases that you will hear in a debate when people are trying to express support or non-support for a particular law. So for example, if they disagree with the tax law, they will typically call it some form of regressive tax. If they agree with it, they might call it say a progressive tax because it sounds so nice, it's a progressive tax. But often these kind of terms are gonna be thrown around without too much nuance once again, and usually they will be thrown around to support someone's particular viewpoint, possibly a particular viewpoint that actually benefits them in some way, the reality of the tax law generally being more complex than that. So I would propose that what we want to do is first think about these definitions in their purest sense and then see how well they apply to a particular tax law, noting that most tax laws are more complex and that we won't be able to put a rigid definition and put the different types of taxes directly into say a flat tax group, a progressive tax group, a regressive tax group, because what we need to do is basically accept the fact that we're gonna have the necessary evil of taxation and then we need to be comparing and contrasting the different taxes and we'll end up using terms if we're looking at it in a more fair and nuanced type of way with terms such as that tax is a flatter type of tax than another type of tax or that tax is more progressive or less progressive than the prior tax law or this law is more regressive or less regressive than a tax law. Obviously in debates, when people are trying to disparage a certain tax if they're against the tax law, they're gonna say that's a regressive tax, it's just in this bucket of regressive tax but obviously the real question is, well, if we don't have that tax, you're comparing it to the prior tax, is it more or less regressive than the prior tax, right? That tax is more progressive. Well, what does that mean in relation to the alternative type of taxation that you're proposing here and that's gonna be the more nuanced view that you gotta look at when you're actually looking at the policy. So a flat tax in its purest sense would be that there's just gonna be one rate. So if you apply that to an income tax, for example, then you would have someone that pays, if they earn more income, they're gonna pay more tax because if they earn less income and you have a 10% tax rate, for example, they're gonna take 10% of the taxes. If they earn more income, then they're gonna take 10% of the higher number and they're gonna be paying more taxes. The benefit of a flat tax is that it's really easy to do and the fact that it's really easy to do allows businesses to have more security and be able to basically calculate into the future a lot more confidently with a simple flat tax type of system. A progressive tax is a system and this is where the tax code is at. So our income tax is a form of progressive tax but you can't just call it a progressive tax because you can always make something more or less progressive. All you would do is add more tables into the system and when you add more tables, what you're doing is you're increasing the complexity which could have negative impacts on decision makers trying to make decisions out into the future versus basically the idea that you're gonna tax more at the higher end. So again, if you're arguing on the progressive tax, then of course you're saying it's not enough that you have people that are earning more pain more just because they're paying the same rate. We want the rate to actually be increasing as the income increases. And again, that's a fair argument to make but we wanna basically make sure that we put it in context of well, how progressive is it and how many layers do we need within the progressive structure and how much does that basically possibly hinder people's decision making capability as business people are trying to make projections out into the future. Obviously as taxes go up, then there becomes kind of a disincentive to earn more revenue after a person certain points. So these are kind of debates between these two. So you'll end up using terms like this tax is flatter which you could say our progressive tax system which is an income tax system would be flatter, be flattened if we took away some of the layers and we just had fewer layers. They would still be a progressive tax with multiple layers but it would be flatter than it otherwise was or you could say that it would be less progressive meaning having less layers than it otherwise would. Now obviously the terms are a little bit deceiving as well because the idea of something being progressive plusing up is sounds a lot more beneficial than possibly a flat tax which sounds kind of neutral and obviously the term regressive tax sounds negative. It sounds like you're going backwards and no one wants to go backwards. And the idea of a regressive tax could be a tax that's gonna fall more heavily on people that make less income than people that are less well off. So if someone has a tax proposal and someone else is against it, what they want to do is put it in the bucket of regressive. Your tax is regressive and that's gonna basically say, well you're just trying to benefit rich people is what the idea of that would be. And again the question is well how regressive is it? I mean is it more or less regressive than the alternative whatever the other tax proposal will be. So a flat tax, this is an example of how you can think of something as kind of flat to a degree but the law isn't exactly completely a flat tax. So most of the time most laws will not fit just perfectly into one of these kind of buckets in one term that can be used to it. So for example, the tax rate remains the same over time. So a pure flat tax would be like I'm gonna just charge 10% whatever for your income tax and no matter what you earn, I'm just gonna take 10% of it and obviously as you earn more that 10% is gonna result in more money that we're taking from you because you have higher earnings. This social security tax is kind of a form of flat tax but it has a cap on it. So you could see it has a flat tax component but then it caps off. So that means it's gonna have some different components than you would typically think of as a normal flat tax. So for example, on your payroll taxes, when you get taxed on payroll and you look at your W-2 the employee side of it is usually generally 6.2% and it is what it is up to a certain point or level of income. So if I took the 40,000 times the 0.062 I would get the 2,480 and if you made 100,000 we would multiply it that times the 100,000 times the 0.062 and we would get the 6,200. So obviously the person that's earning 100,000 in this scenario is paying more than the person that earned the 40,000 even though they have the same rate. We don't have a progressive rate. The rate didn't go up. We've got the same rate that is being applied. However, there's a cap on the social security. So even though this is a simplified tax the benefit of that is payroll taxes to that degree are actually a little bit easier because you can easily calculate the payroll tax. We don't have to say, okay, well what is your earnings gonna be through the end of the year after a year's worth of earnings? Cause I have to multiply your tax rate as if it was earning for the entire year even though I'm only talking about earnings that are in the first week or something like that it's a lot easier to do the flat tax calculation. However, there's a cap on it and that means that people that make over a certain amount are not gonna be paying into that cap and I don't wanna get into a lot of details on that but if you're trying to think about why that isn't in terms of the social security the general idea would be that we're not really sure and the United States whether social security should be like more of a benefit program or basically a federal kind of retirement program we've been kind of debating that type of system so is it a safety net program to help people out if they haven't weren't able to save during their lifetime or is it something that you're paying into and you should get a benefit more like a retirement type of program if it's a retirement type of program then you would think as your income goes up you would get a benefit from it in terms of your benefit calculation at the point in time of when you're gonna be receiving the social security benefit after your working life is over at that point but after your income goes above a certain level there's you're paying a lot of money into the social security but it's not going into any calculation generally for the benefits that you're gonna be getting so that's kind of the idea of why there would be a cap at it at some point in time so you could debate that is that good or bad which the social security be but you know you can see it's a little bit more confusing than just well it's just a flat tax but you can also see the benefit of the flat tax in it it's easy to calculate and if you're a business owner and you're trying to figure out how much you're gonna pay someone and what your social security is and so on that's a lot easier to do a progressive tax is the system for example our income tax system is a progressive tax system that means when you calculate the tax you're gonna have this table that's gonna be actually the calculation of the tax now most people if you were to ask them what a progressive tax system they probably couldn't tell you even that much they would just say well the tax rate goes up maybe as your income goes up but it's a lot more nuanced than that and they certainly most likely wouldn't be able to actually calculate or describe how the tax rate is gonna be calculated that's the problem because and you might say well that's not a problem because you just all you get is tax software and you figure that out and you could do that but there's still kind of a problem with projections business owners are trying to think about and people that are working and so on and budgeting and whatnot are trying to think about how much tax they're gonna owe and if they owe the first thousand dollars when you earn your first thousand dollars in the year you can't just multiply at times a flat tax or a flat rate or any rate because you don't know what your tax rate is gonna be until your earnings are complete at the end of the year so it really does kind of make it a lot more complex to project out into the future to make decisions out into the future because your taxes will be a whole lot different based on your income level and you don't really know what they are until the end of the year so the general idea of it would be that you've got your first tax rate is gonna be taxed at zero to 9,950 here and so that would be at we're gonna say the 10% tax rate and then we're gonna move up so when people say if I earn any more money I'm gonna go up to the next tax bracket now that doesn't mean if you go up to the next tax bracket this is a misconception as well that is possibly used to unfairly downgrade the progressive tax system saying well that doesn't make any sense because as I go up to 12% or as I go up to 37% all the way down here why would I work at all at 37% because now my tax rate is high enough that it's a disincentive to work well you're not getting taxed 37% on the entire thing you're only getting taxed 37% on the dollar amount that's over that threshold so there is a disincentive for people to work as the tax rate goes up but that disincentive kind of caps out you still have the same more incentive at the lower tax rate and then so people might say I'm not gonna earn that next dollar because you took more money from me I'm not gonna earn the next dollar over above that because it's no longer worth it that's kind of the danger when taxes get too high and you can clearly see that because obviously if the government took 100% of your revenue would you work? No, you wouldn't work right so if you looked at the curve basically for taxation that the taxes as the tax rate goes up government revenue goes up right but at some point when the tax rate goes up it's gotta go back down the revenue is actually gonna go back down because we know that way down here if they taxed 100% then no one would work right there would be no incentive to work because they would just take all everything that you earned so the question is that you would think there's a curve so there's a question of well how much revenue how much more revenue is the government picking up or taking in as they increase the tax rate so that's gonna be one of the questions so if we go from the 10% notice if I take 10% of the 9,950 then this table over here saying if you're in the 12% tax bracket we're just gonna take the 9,950 plus 12% of the amount over 9,950 why? Because we taxed the first 9,950 at 10% which is 9,950 about and then the difference between what you earned if you're within this bracket some number below 40,500 is what you are then gonna be paying 12% on and then if you go down to the next tier you've got the 22% bracket so that means that if you made over 40,526 then the amount of the 40,526 is now being taxed at 10% and then at 12% up to the 40,526 and then the difference between the 40,526 and where your income is is going to be taxed at the 24% so they can simplify that by basically saying we're gonna take 4,664 which is about the 10% and the 12% portion and then you have to calculate the 22% of the amount over the 40,525 and so on and so forth if we go on to the next one 86,376 is the amount that includes this 14,751 includes the three brackets the 10, the 12 and the 22 and then you have to calculate the rest of your income based on the higher bracket of the 24 and then if you go up to here, the 164,926 is calculated based on 24, 22, 12 and 10 and so on and notice if you make a lot of money you're being taxed at multiple brackets so if you were to actually calculate this like in Excel it would be kind of a complex calculation again the computer basically does this now if you have tax software and you're actually doing the taxes it's not as big a problem when you're actually doing the taxes because the software's gonna do it for you and you'll just basically calculate it out but when you're projecting out into the future that's when it's gonna be kind of more of an issue and when you're talking to people about their tax rate then you've got an issue of like well this is your highest tax bracket but you also can think about your average tax rate and you also have to think about your average tax rate on taxable income as opposed to your actual income before deductions and before credits and so on that are gonna be involved as well so it becomes somewhat complex to actually know how much tax you're paying with it as the tax brackets become more complex now you could propose tax laws and start to say okay would it be beneficial say for us to have instead of one, two, three, four, five, six, seven tiers to only have maybe three tiers and that would be less progressive or more flat or would it be better for us to have more tiers in here and that would basically make it more progressive and less flat so really what you're talking about oftentimes is it more or less of a flat or progressive tax now a regressive tax is usually gonna be something that's gonna be something that people will use when they're trying to talk down the tax the tax rate decreases as wage base increases in other words the tax falls more heavily on people that have lower income it's gonna fall more heavily on people of lower income so that it's gonna be regressive and people are gonna say well that's obviously not fair you don't want it to be regressive if people are making more income then they should be paying more taxes and shouldn't be going the other way around so tax resulting in a larger percent taking from low income earners is another way that you can think about that and a category that people often bring up is gonna be sales tax now again the problem is with this is that's not really fair to just apply it out to complete sales tax because the tax code is usually more complex than just to say well that tax is regressive and again you'll note that when people don't like a particular tax what they're gonna do is they're gonna say so that's a regressive tax I have categorized it into this bucket and now you can't touch it anymore because it's got cooties or something like that but really the question is is it more regressive or less regressive than the alternative so in other words if you think about a sales tax the reason in its classical form you would think it be regressive is because if you earn all your money that you are earning goes to buying the necessities food, gas, clothes and so on then you're paying all of your money as being taxed right but if you are earning more than you need to spend if you're saving some of your money then you're not spending all of your money only a portion of your money is being subject to the sales tax and therefore the sales tax will generally incentivize savings so sales tax is usually something that's gonna incentivize savings whereas an income tax will often possibly incentivize more on the spending side of things and that is true on the sales tax if you were to say there's a flat sales tax on everything that you purchase we're gonna apply a sales tax when you buy something we apply whatever a 10% sales tax on it and you pay 10% no matter what you buy and that would mean that people that have to spend all their money to buy bread are gonna be paying more than people that don't have to spend all their money and can save some of their money and not have to pay money on the sales tax however you can easily change that by just saying well what if we just say we're not gonna charge sales tax on some of the necessities we're not gonna charge sales tax on bread we're not gonna charge sales tax on groceries we're not gonna charge sales tax on food possibly gas and utilities and so on electric that's the stuff that people spend that are in the lower income spend all their money on and therefore if there's no sales tax on those things now the sales tax no longer falls on the low income earners it falls all on the higher income earners who are using their money to purchase stuff and it falls on earners who are more are buying things that are more extravagant like your yacht is gonna cost you a lot of sales tax if you're subject to the sales tax so you can see again these kind of laws people often see these laws and they say well as soon as they hear something like well it's a sales tax that's regressive I won't touch you know that's it's been put in the category I know that and so they never look at anything a little bit more nuanced than that so really these kind of terms you gotta look at them and say okay who is the person saying what the term is do they have any incentive on why they would be in a proponent or not liking this tax and then basically compare what they're saying about the tax to the alternative because we know there's gonna be a necessary evil of taxes the question is is this tax relatively better than the alternative