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Pondering About Income Tax

Posted by on March 15, 2013 0 Comments Category : Blog

Why You Need to Sit Down and Ponder About Income Tax

What makes income tax one of the most important things that we have to deal with in our lives? Among the hardest things every individual has to accomplish on a yearly basis is giving up some portion of their income to the US government. Realizing this may be difficult to some, especially when they are also having a hard time seeing and knowing what such portions of their income are being used for.

The income tax is a levied amount taken out of an individual’s earnings. This is also the practice with business entities, though it is more aptly termed as corporate tax. Distinct payment types differentiate such tax. Progressive tax means there will be an increase in tax payments should you also gain an increase in your profits earned on a given business year. This particular tax payment is applied to individuals and entities who earn a great deal of money on an annual basis. With their increased base income, the government will also have the right to tax more from them as well.

Proportional tax is another income tax payment type imposed on taxpayers so that tax rates will stay fixed. The tax amount will be proportional to what is subjected to taxation. Being proportional means working on a distribution effect on the income (or the expenditures in other cases), referring to the ways that the tax rates will have to remain consistent, where marginal tax rates are of the same plane as the average tax rates. Note that this does not progress from the low-to-high or high-to-low behaviors as the income or consumption changes. Simply put, proportional tax payment happens when what is involved reveals only a flat rate. This happens on various account types and products.

This system can be geared towards tax systems as a whole, or individual taxes in most cases, be it on a yearly, multi-year, or a lifetime basis. It is also a strong characteristic of proportional taxes to maintain an equal tax incidence behavior, despite the ability of taxpayers to pay, and will not move to shift such incidence disproportionately with cases having lower or higher economic well-being.

There are exemptions defined for various households. Regressive tax comes into the picture as a complete opposite of what progressive tax signifies. This particular tax will be imposed to create the necessary conditions for the tax rates to decrease as the amounts covered by the taxation increases. To figure “regressive” means to initiate a distribution effect geared towards the income or expenditures, following the guidelines of how tax rates progress from high to down low, or where the average tax rates will have to exceed the marginal tax rates.

When it comes to individual income and wealth, a regressive tax clause implies the poor will have to carry a heavier burden as compared to the rich. This is so since there is now an inverse relationship that brings the tax rates and the ability of taxpayers to pay as measured by their income, assets, or consumptions.

Understanding all these distinct income tax payment schemes will go a long way to creating a strong foundation for your tax preparation activities. It would also help a lot to know where you fit into all these.

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