![]() Tax incidence is said to “fall” upon the group that ultimately bears the burden of, or ultimately has to pay, the tax. In economics, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. Identify who bears the tax burden in various scenarios.But it does not need to be limited to those states while legislative inertia prevents most states from shifting to a flat-rate tax with a demogrant, the successful adoption of such a tax by a constitutionally constrained state may encourage other states without constitutional constraints to consider this more efficient model of progressive income taxation.\) This type of flat-rate tax with a demogrant should meet the constitutional requirements of states with mandatory flat-rate taxes. Through the use of a flat-rate income tax with a refundable tax credit-called a “demogrant”-states can enact a flat-rate income tax that is simultaneously remarkably progressive and is more economically efficient than an income tax with progressive marginal rates. Moreover, it may lead these states to adopt a more progressive income tax. While the impediment appears insurmountable, however, it can in fact be overcome. Without a constitutional amendment, a difficult process, they cannot adopt marginal rates that increase as income increases. ![]() ![]() To ensure the fairness and progressivity of their overall revenue system, states need their income tax to be sufficiently progressive.įour states face an apparently insurmountable barrier to progressive income taxation: their state constitutions mandate that any income tax must have a flat rate, applicable to all taxpayers. Property and sales taxes tend to impose a higher burden on low-income households. ![]() State and local governments raise revenue in three primary ways: property, sales, and income taxes. ![]()
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