2.03 Are Taxes Fair?

Learn

How does the government collect taxes?

The government relies on individuals to file and pay their taxes based on the honor system. This is also called voluntary compliance.
Voluntary compliance means that we are expected to file an accurate tax return. It must be filed on time and without government involvement. We must also keep accurate records.
However, filing and paying taxes is not truly voluntary. Failure to follow the rules can result in fines, interest charges, and even criminal charges.

Progressive taxes are taxes that increase in proportion to income.
Federal taxes are progressive.
Somone with a lower income might pay no taxes at all. Someone with a higher income will pay a larger percentage in tax.

Regressive taxes are taxes that take a smaller share of income as the amount of income grows.
Sales taxes are regressive. If your income is low, sales tax represents a larger percentage of your income. If your income is high, sales tax represents a smaller percentage of your income.
For example, if the current sales tax is 5% and you purchase something for $10, you will pay $10.50 for the item. If you make $50 per week, this 50 cents for sales tax is 1% of your income. If you make $100 a week, this 50 cents only represents a half of a percent of your income.
It is easier for a person with higher income to afford sales tax than a person with lower income.

Proportional taxes are taxes for which the rate stays the same regardless of income.
Proportional taxes are also called flat taxes.
Property taxes are proportional taxes. In most cases, you will pay a percentage of the value of the property you own in tax. No matter how much the property is worth, the tax rate is the same.