Income Inequity July 14, 2010
Posted by petrarcanomics in Role of Government.trackback
Another market failure is income inequity which is massive differences in incomes realized by different types of labor. Government tries to lessen income inequity through various tax systems.
- Proportional tax system – A proportional tax taxes an equal percentage of income from all tax payers. For example, two tax payers of different income will each pay ten percent of their income in taxes. A person who earns $100,000 will pay $10,000 while a person who earns $50,000 will pay $5,000 in taxes.
- Regressive tax system – A regressive tax will tax a higher percentage of income from the lower income earner while at the same time taxing a lower percentage of income of the higher income earner. For example, a person who earns $100,000 will pay $9,000 (9%) in taxes while the person who earns $50,000 pays $5,000 (10%) in taxes.
- Progressive tax system – A progressive tax system taxes higher income earners at a higher percentage of their income than it does of lower income earners. For example, a person who earns $100,000 will pay $10,000 (10%) in taxes while the person who earns $50,000 pays $4,000 (8%) in taxes.
A progressive tax system such as the one used in the United States is a way of government lessening the income inequities produced by the market economy.
For more information, see Reffonomics: Lorenz Curve and Gini Coefficient Lesson, Multiple Choice Questions.
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