A Distribution Analysis of the Tax Systems - Essay Example

Who Pays Prompt The and local government taxes are mostly regressive. According to the Institute on Taxation and Economic Policy report, the state and local governments engage in redistribution from the middle-class and the poor to the wealthy. Notably, the effective tax rate of approximately twenty percent of the taxpayers who earn the lowest income is arguably more than twice that of the top one percent of the taxpayers. The poor and middle class populations in America will contribute 10.9 and 9.4 percent of their income as tax (Davis et al 3). On the other hand, the one percent of the Americans will pay 5.4 percent of their earnings as tax. The disparity is debatably the right definition of the regressivity depicted by the state and local government systems. The consumption taxes tend to be regressive because the one percent of the rich enjoys exemption of many things. The governments over rely on the excise and sales taxes. The poor appears to pay disproportionately for the local and state governments. There are notable reasons to underpin why the local and state governments are mostly regressive. To start with, the type of taxes that the government imposes on the taxpayers contributes to regressivity. For instance, the sales and excise taxes are regressive. Similarly, the property tax is regressive although those imposed on the state-level earnings appear to exhibit progressiveness (4). Counterarguments on the progressive nature of the property tax hold that it lies in the class of benefit tax, which is regressive. Another reason to attribute to the regressive nature of the state and local government tax is the increasing the inequality gap between the states. Notably, the states with the highest number of low-income earners pay the enormous amount of tax. Such states have higher tax rates than the rich states for even the fundamental services as indicated in the Institute on Taxation and Economic Policy report. In essence, the state and local government tax are regressive by both design and nature. It appears the regressive taxes are a pronounceable feature in many states in the US. Prompt 2 The most regressive states includes Washington, Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas, and Indiana. Florida, Texas, Illinois, and Kansas over rely on property tax. Property tax is regressive in nature. Florida, Texas, Illinois, Arizona, Indiana, and Kansas enjoy homestead exemption (14). A portion of the most regressive states offers circuit breakers as credit to ease the strain of offsetting the property tax bills. Notably, Arizona, Washington, South Dakota, Kansas, and Pennsylvania offer property tax credits to the elderly populations. However, the ten regressive states do not have low-income circuit break to help low-income renters, as well as, homemakers of varied ages. Washington tops the list of the states with the highest taxes on the poor population. According to the Institute on Taxation and Economic Policy report, Washington levies tax amounting to 16.8 percent of the total income (15). On the other hand, Arkansas charges 11.9 percent of the total income that the poor citizens earn. The retirement and pension income are exempted from taxation in Illinois. The state incurs the cost of such exemption. Statistics indicates that the cost of exemption in Illinois amounts to over $1 billion yearly (16). The most progressive states encompass Montana, Oregon, Vermont, California, Delaware, and the District of Columbia. The common attribute that the progressive states share is fairness in the tax systems. The state and local government tax systems are fairer in the progressive states as compared to the regressive ones. Similarly, the highest ranked states have progressive income taxes and tend to supplement the federal earned-income tax credit program for the moderate and low-income earners with refundable credits to assist in offsetting the property, as well as, the sales taxes. The measures tend to reduce the overall tax bill for the taxpayers who meet the set requirements. The vibrant progressive income tax structures embraced by the states counteract the deleterious effect that inequality poses on the growth rates of the tax revenue. In addition, the progressive states rely less on the excise and sales taxes. For instance, Delaware depends on progressive income tax as opposed to the consumption and personal taxes (5). California, District of Columbia, Minnesota, Oregon, Montana, and Vermont have refundable Earned Income Tax Credits for the low-income earners. Prompt 3 States have a varying degree of regressivity and progressivity in state and local taxes as contained in the Institute on Taxation and Economic Policy report. Notably, the ten most regressive tax systems include South Dakota, Florida, Illinois, Washington, Texas, Pennsylvania, Indian, Kansas, Tennessee, and Arizona (4). On the other hand, the progressive tax systems encompass California, the District of Columbia, Delaware, Montana, Minnesota, Vermont, and Oregon (5). The high taxation on the low-income earners characterizes the most regressive states in US. The poor pay more while the rich pay less. States such as Florida, Texas, South Dakota, and Washington do not charge personal income tax (4). Tennessee imposes the personal income tax on the dividend, as well as, the interest income. Similarly, states such as Illinois, Pennsylvania, and Indiana utilize the flat rate tax system that disadvantages the poorest income earners. Washington, Texas, South Dakota, Florida, and Arizona tend to depend hugely on the excise and sales taxes. The aforementioned taxes are regressive in nature and design. The main attribute of the progressive state and local tax systems is less reliance on the regressive excise and sales taxes. Instead, the progressive tax systems depend on the income taxes. Vermont features in the list of the progressive tax systems due to over dependence on the income tax. Similarly, Delaware least depends on the consumption taxes. In Delaware, the upper-income earners contribute a large percentage of their income towards tax than the low-income earners do (6). Oregon has a fair tax system that incorporates refundable Earned Income Tax Credit. Likewise, the tax rate structure of Oregon’s personal income is impressive and does not exhibit regressivity. Montana lacks the sales tax and does not depend on consumption taxes. Equally, the tax systems in the District of Columbia and Minnesota are highly performing. The two states offer the refundable Earned Income Tax Credit. California tops the list of the least regressive states as it relies enormously on the progressive income tax (9). Arguably, the design of the tax system in California is quite different, and the state does not primarily depend on the consumption and property taxes as sources of tax. Prompt 4 Massachusetts differs from the rest of the states on the aspect of the general taxes. According to the analysis of the Institute on Taxation and Economic Policy, the Massachusetts families that rely in the lowest twenty percent of the income contribute 1.8 percent of their total income as direct general sales taxes (72). Notably, unlike many states, the share of income in Massachusetts drops gradually as the level of income increases. As indicated in the chart, the one percent contributes to approximately 0.3 percent of their total income to the general sales tax (72). Arguably, the difference is attributable to the disparity between the consumption rates of the high and low-income taxpayers. The lower-income earners tend to spend a large portion of their funds to satisfy various needs. In contrast, the high-income earners spend a small portion of income and invest or save the remainder. Unlike the other states, Massachusetts has the smallest percentage of the personal income that goes to general sales taxes. Notably, the personal income tax is 0.8 percent for the lowest twenty percent income group (72). Nonetheless, the overall effect of the general sales tax is regressive just like the aforementioned ten states with highest regressivity. Thus, the low-income earners in Massachusetts pay more taxes from their total income, and the richer contribute less towards tax. Work Cited Davis, Carl et al. Who Pays? A Distribution Analysis of the Tax Systems in All 50 States. Web. 10 Mar 2015 < http://www.itep.org/whopays/full_report.php> Read More