 Hello, and welcome to the session in which you would look at the three tax rate structure, which are progressive, proportional and regressive. And I will also discuss marginal as well as average tax rate. Before I start, if you're a CPA candidate, I would like to remind you to check out my website, farhatlectures.com. I don't replace your CPA review course, whether you're taken Wiley, Glyme, Roger, or any other course. I can be a useful addition. I can help you add 10 to 15 points to your CPA exam score by explaining the material a little bit different. Look, here's your risk. Your risk is one month of one month of subscription. Your return is possibly passing your exam. Are you willing to take that risk? And if not for anything, check out my website to see how well or not well your university is doing on the CPA exam. And I do have resources for other college courses. Please connect with me on LinkedIn and on LinkedIn, you can check out my recommendation, other people recommendation that they used my system to succeed. Please like this recording, share it, connect with me on Facebook and Instagram. So let's talk about the three tax structure. And the first one is progressive. What is a progressive tax structure? Well, our system, our federal income tax system is progressive. It means the tax rate increases as the tax base increase. Simply put, the more money you make, the more taxes you pay. This is what progressive is. It progresses up. As you pay, it goes up. The more, the more you make, the more you pay. Okay, example is the US income tax system. The best way to illustrate this concept is to look at an example. Mary and George are married, file a joint return and have a taxable income of $335,000. For a given year, this is how their tax liability will be computed. For example, the first $19,750, they will pay on this first amount 10%. And this will amount to $1,975. Now, the next dollar that they earn above $17,000, $19,750, between $19,750 and $80,250. So this is where we call their next bracket. So the next bracket, let's see how much it is. So I'm going to take $80,250 minus $19,750. That's $60,500. So the next $60,500, they will pay 12%. So notice the rate, the rate, the rate went up by 2%, went from 10% to 12%. Then every extra dollar they earn above $80,250 up to $170,050. Again, you can compute the bracket here. They will pay actually then it goes up 10%. Notice it's progressive. And this will amount to $19,976. Any amount they earn above $17,150 up to $326,600, they will pay 24%. And any amount from $326,600 up to $335, they'll be in the 32% tax bracket. And any amount above this amount, it will be a new tax bracket. So simply put notice the progressivity of the tax. Now, what you need to understand as the following is we have something called the marginal tax rate. So what is the marginal tax rate? And the marginal tax rate is related to progressive. Basically, it's the proportional tax that the taxpayer pays on the last dollar of the taxable income. It means the rate that they pay on the last dollar of taxable income. So in this situation, if I ask you, what is the marginal tax rate for Mary and Josh? Well, what was the rate? What's the proportion? We're going to look at what proportional means. It means what's the flat tax rate proportional means flat? What is the tax rate that they paid on the under their last dollar? And the answer will be 32%. So the last dollar they earned, they pay 32 cent of it in federal tax. This is called the marginal tax rate. Okay, now, if you make a lot of money, you will be in the marginal tax rate 32%. We have to differentiate the marginal from the average tax rate. What is the average tax rate? Simply put, how much you paid in total taxes? How much you paid in total taxes? Well, simply put, it's the percentage that a payer pays given a certain amount of taxable income. So Mary and George in total, they are responsible for paying $69,231 and they made $335,000. Now we can find what is their average on average? How much they pay for older taxes? We know they're marginal. We know that they paid on their last dollar 32%. That's their marginal. Their average, we're going to compute the average now 69,231 divided by 335. And their average tax rate is 20.66%. So if I ask you what is their average tax rate, you will take how much they paid in total divided by the taxable income, what is their marginal tax rate is 32%. So what happens sometime in the news, they kind of confuse you, they quote or aid, but they don't tell you whether it's the marginal or the average, because always the average is lower than the marginal, the average tax rate. So that's those two terms you need to be familiar with, the difference between marginal and average. Now the next tax structure we're going to be looking at is proportional. So proportional, what is proportional? Simply put, we just kind of mention it, it's a flat. The same tax rate is used regardless of how much money you make. So it's for example, 10%, 15%, and whatever you make $10, $100, $10,000 or $10 million, you'll pay a flat rate. Examples of this will be the state, for example, in Pennsylvania, the rate is 3.07. Or your local tax rate, for example, my local sale, my local sales tax is my state tax, sales tax is 6% flat. Also Medicare, which we'll see later is 2.9%. This is what proportional tax rate is. It means it does not change regardless. So if you made $100, $1,000, if you have a taxable income of $100,000, you'll pay the same rate, whatever that rate is, 6%, 5%. This is what we called proportional tax rate. And the third tax rate is a regressive tax rate. And what is a regressive tax rate? Well, regressive kind of opposite of the progressive, the tax rate decreases as the tax base increases. So simply put, the more you make, the lower is your tax. That's how it works. It's the kind of thing regressive is the opposite of progressive. Progressive is the more you make, the more you pay. Regressive, the more you make, kind of the less you pay. Now, what could be an example of regressive? Well, social security. The social security tax is considered a regressive. Now, why is it considered a regressive? Here's why. And we're going to talk about this later on. When you make, when you earn your income in the US, well, up to a point, you'll pay social security. And for a given year, let's assume the limit is $137,000, just for the sake, $700,000. And this number will change every year. So although I'm telling you, maybe this is for this year, but this will change the next year or the year after or whatever. Now, the rate is 6.2%. So a few, let's assume you made, let's assume for the sake of illustration, you made, let's assume you made $100,000. Well, if you made $100,000, we're going to take $100,000 times 6.2%. You are responsible for paying $6,200 in social security. And your tax rate is 6.2%. That's fine. Let's assume you made $137,700. Well, we're going to take $137,700 multiplied by let's say 0.062, which is 6.2%, you will pay $8,537,040. This is how much you pay in social security. Let me tell you something. If this is the amount, if this is the limit, it means that's the maximum amount you'll pay in social security. Let's assume an individual made $250,000. Guess what's going to happen? Every dollar you are going to earn above $137,700. Every $1 you earn, it's social security tax-free. What does that mean? It means although you made, although your earnings are $250,000, you are only going to pay this amount. So you stop paying taxes. What does that mean? It means if we take $8,537.40 divided by $250,000. And notice what happened as you earn more. As you earn more, if we take $8,537.40 and divide it by $250,000 for somebody who made $250,000, your rate is 3.41%. So notice what happened to your rate. As you made more money, your tax rate, your social security tax rate went down. Now, if you made a million dollars, a lot of people make million dollars, even your tax rate is lower. So the more you pay, the more you earn, the less is your rate. Now, we'll talk later on about the social security a little bit more in details. Why is it, why does it work that way? And we need to a little bit more about its computation, about its limitation, so on and so forth. But this is an example of a regressive tax rate, regressive tax rate. Regressive tax rate is considered unfair. It's considered unfair because think about it, the more you make, the lower is your rate. So basically, you just make sure you are familiar with those terms. Usually, they are covered in an introduction to income tax scores. Once again, I would like to remind you if you're a CPA candidate to check out my website, farhatlectures.com for additional resources for your CPA exam. Just check out my LinkedIn. That's all what I suggest if you have any doubts. Good luck, study hard, and most importantly, stay safe.