[A:] Thank you for your great question.
To first consider how much a taxpayer would pay under a flat tax system, first we have to consider a flat tax proposal. Lets consider the proposal by Malcolm S. Forbes, Jr. from a few years back. At its core it has the two basic features:
- A $13,000 per taxpayer basic personal exemption
- A 17% tax rate on every dollar earned past that $13,000
Your concern that richer people should pay a higher proportion of their income is not dealing with marginal tax rates but instead with the average tax rate. Unlike the marginal tax rate, the average tax rate measures what percentage of your overall income goes to the taxman. We can see the difference with the use of an example.
Take a man who earns $20,000 a year. His marginal tax rate is 17% because if he earns an extra dollar that is the rate at which he will be charged. His average tax rate will be different, as he is exempt from paying taxes on the first $13,000 he earns. Thus he has to pay 17% on the remaining $7,000, for a tax bill of $1,190. That $1,190 represents 5.95% of his total income, for an average tax rate of 5.95%.
With the basic personal exemption, a low income taxpayer has an average tax rate which is much lower than the marginal tax rate of 17%. Here are the average tax rates for income levels above $20,000.
Average Tax Rates Under The Forbes Plan
- $30K: 9.65%
- $40K: 11.48%
- $50K: 12.58%
- $75K: 14.05%
- $100K: 14.79%
- $200K: 15.90%
By examining the difference between marginal tax rates and average tax rates we see that even under a flat tax proposal the rich would still pay a higher proportion of their income in taxes.
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