ECON 3C03 McMaster University Income Tax Systems Discussion
Description
write a 1-2 pages (2 pages maximum) summarizing a topic related to the course material covered that week — income tax system systemYou are free to choose any topic related to the course material for that week. In the past, students have followed one of two strategies for their weekly writing assignments. One strategy involves summarizing multiple topics from the course material without going into depth on any one topic (because of the strict page limit). A second strategy involves focusing on one topic from the week in question and going into more depth. Both are strategies acceptable.Importantly, your summary should be *in your own words* and not copy/paste/repeat phrases or equations from the course lecture slides. Students that violate the university’s academic integrity policies (e.g. plagiarism) will automatically receive a grade of 0 and will be referred to the Faculty of Social Sciences. Assignments will be checked using Turnitin.com in order to detect plagiarism.You will be graded both on what you write (i.e. content) and on the writing itself (i.e. spelling, grammar, organization and style). Assignments that demonstrate an understanding of the course material for that week and are written well should expect to receive a 4/5. Submissions that are not well written and/or that do not demonstrate an understanding of the course material will receive a grade of 3/5 or less. To receive a grade of 4.5/5 or 5/5, assignments must go above and beyond by providing insights/analysis that go beyond what is discussed in the lecture videos and the tutorials or that link the course material to real-world policy debates.
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Econ 3C03 assignment 4 week 4
There are three types of income tax systems: proportional, progressive and
regressive tax systems. Proportional tax system is when taxpayers pay a fixed
percentage of income tax on their income regardless of how much he/she earns.
For example, if the tax is 10 percent, an individual earning $45000 will pay $4500
and an individual earning $100,000 will pay $10,000 in taxes. A progressive tax
system is when, as income increases, the tax rate increases. An example would be
that an individual earning less than $50,000 pays 5 percent, but as income
increases above $50,000, tax rate increases to 10 percent and so on. The third type
of tax system is the regressive tax system in which as income increases, tax rate
falls i.e., the opposite of a progressive tax system for example someone earning
less than $50000 would have tax rate as 10 percent but above $50000 tax rate falls
to 5 percent and so on.
Nowadays, tax systems are much more complicated. For Canada, the federal
income tax rate is based on a progressive tax system, i.e. as income increases,
amount of tax increases too. Income is divided into tax brackets. The first $48535
of income has a 15 percent tax rate, the next $48534 has an income tax of 20.5
percent, 26 percent on the next $53404, 29 percent on the next $63895, and a fixed
rate of 33 percent of tax on incomes over $214,368. This information can be
viewed on the Canada revenue agency website.
For taxes on products and services, Whether the burden of tax (tax incidence)
imposed on a product lies on consumers or producers depends on the elasticity of a
product. The elasticity of demand is the change in demand due to one percent
change in price and the elasticity of supply is the change is supply of a product due
to a one percent change in the price of the product. When there is a large change in
demand/supply due to a change in price, that means the price elasticity is high and
when there is a small change, it is low.(inelastic). If the price elasticity of demand
is more elastic than that of supply, the sellers (producers) pay a higher portion of
tax and if the PES is more elastic, the buyers pay a higher portion of the tax.
Income Tax is a controversial subject in economic policy with different economists
and politicians having different views on how taxes should be implemented. Some
individuals agree on increasing taxes on the high-income earners, as this would
reduce income inequality and the tax revenue generated can be used on public
goods such as education and healthcare, whereas others are in favour of providing
tax breaks to high income earners and businesses. The reason behind this is that if
taxes are high, high income earners and businesses may shift operations out of the
country which may cause harm to the overall economy as this might increase
unemployment and foreign investments in an economy.
Economics 3C03: Weekly Review 4
The study of taxation is fundamental to the field of public economics. In this review, we
will gain an understanding of three important measures of taxation at the individual level and we
will compare three income tax systems that could be imposed by the government. We will use
common-sense examples to demonstrate them in an intuitive environment.
Before we can dive into income tax systems, we need to understand tax liability, the
average tax rate and the marginal tax rate. The tax liability is simply the total tax that someone
must pay. If someone earning $100,000 per year must pay $30,000 in income taxes, they have a
tax liability of $30,000. The average tax rate measures the proportion of one’s income that goes
to pay their taxes. With our individual making $100,000 per year and paying $30,000 in income
taxes, we see that 30% of their income goes to pay their taxes. This means that they pay an
average tax rate of 30% of their income. The marginal tax rate is the proportion of tax that must
be paid on each extra dollar of income that is earned. Without knowing the marginal tax rates set
by the government, we do not know how ones taxes are affected by new income. Our individual
earning $100,000 per year might face a marginal tax rate of 20%, 30%, 40% or any other
marginal rate depending on the tax system in place. We explore these tax systems now.
Three common income tax systems are progressive, regressive and proportional taxes.
We will explain the implications of each system by comparing the tax liability, the average tax
rates and the marginal tax rates for high-income and moderate-income individuals. Suppose that
we classify our high-income individual as earning $100,000 per year while our moderate-income
individual earns $50,000 per year. We exemplify their income taxes in the table below:
System
Income
Tax Liability
Average Tax Rate
Marginal Tax Rate
Progressive
50,000
10,000
20%
25%
100,000
30,000
30%
35%
50,000
15,000
30%
25%
100,000
20,000
20%
15%
50,000
12,500
25%
25%
100,000
25,000
25%
25%
Regressive
Proportional
In our progressive tax system, we see that the high-income individual pays more in taxes
in terms of money, as a fraction of their income and has a higher marginal tax rate. One major
advantage of a progressive tax system is that those with a high ability to pay must pay the most,
while those that cannot afford it pay the least. To compare, our regressive system the highincome individual still pays the most taxes but their proportion of their income devoted to taxes
is less. Those that earn the most are rewarded by paying less of their income to taxes while those
that earn less must pay more. Additionally, the marginal tax rates show that if each individual
earned one more dollar, the high-income individual would pay less tax on that dollar than our
moderate-income individual. In our proportional tax system everyone faces the average and
marginal tax rate and we see that doubling ones income will also double their tax liability. This
is the simplest form of taxation as everyone, regardless of income, must pay the same share of
their income to taxes.
Most nations, including Canada, follow a progressive tax system. Many consider this to
be socially desirable as those with a high-income must contribute the most back to society as a
fraction of their income. Nevertheless, the debate about specific rates and laws that should be
implemented is ongoing and is unlikely to end anytime soon.
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tax rate remains
redistributing incomes
limited tax burden
degree of progressivity
political influence
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