 Hello and welcome to the session in which we would look at the different type of tax structure. There are three common types of tax structure which are progressive, proportional, which is also, you may know it as a flat tax, and regressive. These structure differ in how they impact, how they affect the taxpayer based on their income level. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. Starting with the progressive tax system, how does the progressive tax system work? Well, the progressive tax system works in the way that the more money you make, the more taxes you pay. The higher is your income tax rate. So a progressive tax system applies higher tax rate as income increases. So as your income goes up, your taxes goes up. As your income goes up, you'll pay more taxes. In this system, lower income individual pay a smaller percentage of their income in comparison to higher income individual. So if you make more money, your tax rate is higher. You pay a larger percentage of your income. The rationale behind this progressive system is to redistribute the wealth more equally and alleviate income inequality. And this way you don't put a lot of pressure on low income individuals. That's the logic behind it. Now, for example, the US system is a progressive tax system. And specifically, the US system has a seven multiple tax bracket. And in 2022, those brackets ranged from 10% as low as 10% to a high as 37% for the highest income earners. If you can see on the slide, I do have the tax bracket starting from 10, 12, 22, 24, 32, 35 and 37. Again, this is the 2022 tax bracket. These will change every once in a while. So just know we are dealing with 2022. Just to give you an idea, we're going to work with a single individual, but the same concept, whether you are single, head of a household merit filing jointly or merit filing separately. Starting with a single. Starting when you make your first dollar up to 10,275, you pay 10% on that on these earnings. Once you exceed 10,275, so once you make this additional dollar starting at 2,276, when you make this additional dollar above 2,775 up until 41,775, you will pay 12%. As your earnings went up, as you exceeded 10,275 up to 41,775, your tax rate increased. Now, again, once you make this additional dollar above 41,775, so at 41,776 up until 89,075, you pay 22%. Once again, what are we seeing? We are seeing this as you pay more, as you make more, as your earnings goes up, your taxes go up. Again, the same concept. Then it goes from 22 to 24%. The minute you earn one additional dollar above 89,075, so once you earn this additional dollar at 89,076, you'll start to make, you'll start to pay 24% up to 170,170,050. If we keep going, the highest rate, the highest rate tax bracket is 37, and for a single individual it starts at $539,901. Each dollar you earn above this amount, the government will take 37%. We call this is your marginal tax rate if you make this much. Now, if you make between 170,51 and 215,950, if you make between those, we'll say your marginal rate is 32. Now, in a different session, we'll look at the marginal rate versus the average rate, but just kind of give you an idea. So this is what we mean by a progressive tax structure. The more you make, the more you pay. Now, we also have a proportional tax structure. Again, this is called a flat tax structure. Well, it's also known as a flat tax system. It applies the same tax rate to all taxpayer, regardless of income level. So it doesn't matter how much money you make, you pay the same percentage, which is different than the US system. This system is simpler for one thing. It's simpler just take how much money you make multiplied by a percentage. It's simpler than a progressive system. As it involved one tax rate, it may perceive as less fair, but it does not take into account the ability to pay. So really you would think, well, flat, flat system is a fair system. Right? Why? Because everyone paying the same percentage. Well, actually it looks fair, but in reality, we're going to see it's regressive and we're going to see what regressive is. But let me just give you an example how it works for first. For example, a country with a flat tax rate of 15% would require everyone that earns 300,000 to pay 30,000 to pay the same percentage. If you earn 30,000, you pay, for example, 15% on that. If you pay, if you earn 15,000, you pay 15% of that. And let me show you, let me show you how it works. So if you take 30,000 times 0.15, you pay 4,500. If we'll take 300,000 times 0.15, you will pay 45,000. You might be saying this is fair. They're both paying 15%. Well, here's where the unfairness occur or in actuality, it's not fair. Why? Because a person that's making 30,000, 4,500 is a large proportion of their income. 4,500 is a large proportion of their income. In a sense that someone is making 30,000. If you take 4,500 from them, they're going to feel poorer. Versus someone who's making 300,000, or let's assume 3 million for that matter. Let's go from 300,000 to 3 million to see it clearly. If somebody is making a paying 15% based on 3 million, they will pay 450,000. This individual can easily afford, if somebody is making 3 million, they'll pay the 450,000 and they will not be affected as much as a person that's making only 30,000 and paying 4,500. Although it's the same percentage, but the dollar, also the 3 million is paying more in dollar amount. But from an ability to pay perspective, the 3 million dollar individual has more ability to pay than the 30,000. This is what we mean by a flat tax system is an actuality. It's a regressive system. Companies like Estonia and many other Eastern European countries, few of them, they have this flat tax system just so you know how it works. Let's take a look at a regressive tax structure. Well, a regressive tax structure, just you need to learn about it. There is no country that uses it. The way it works, it's like basically the opposite of a progressive. A regressive tax system applies lower tax rate as your income increases. So as your income increases, your tax rate goes down. In this system, lower individual pay a larger percentage of their income in comparison to higher income individual. It's clearly shifting the burden to low income individual and no tax system is a regressive. But a flat tax system and actuality is a regressive system. Now, for example, we do have regressive system, but from a flat tax system perspective. For example, sales tax on goods and services are often regressive as the tax amount is the same for everyone. Same for everyone means proportional means flat. A lower income earner who spends a higher proportion of their income on taxable goods will end up paying higher percentage of their income in sales tax compared to a higher income earner. What does that mean? It means an individual that, for example, again, if we're making $30,000 in this individual will have to spend the $20,000 in buying goods and services. If they're paying $20,000 times 10%, so they have to pay 10% tax on that. Well, different from an individual who's making $3 million and they only spend the $20,000 and they only have to pay 10%. Notice this individual, 20% is $2,000. So now you're taking your tax in them, you're taking away $2,000 from them. Okay, and you're taking also $2,000 from this individual. Why? Because they both purchased $20,000 worth of goods and services. It's fair. Well, it is fair, but the person with $30,000 don't have the ability to pay. So in actuality, it becomes a flat tax system becomes regressive in that sense. In that sense, it becomes regressive. Now, what I'm going to do next is work an example to show you how to compute taxes, how to compute the taxes using a progressive tax system such as the US tax system, just to show you how we compute, how much you have to pay, how to compute your amount. What should you do now? Whether you are an accounting student CPA candidate, enrolled agent, you should go to Farhat Lectures. 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