Tax Structures: Types & Concept

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  • 0:02 Types of Tax Structures
  • 0:17 Regressive Tax Structure
  • 1:03 Progressive Tax Structure
  • 1:28 Proportional Tax Structure
  • 2:28 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Governments can use different tax structures to collect revenue. In this lesson, you'll learn about three major tax structures that governments employ. You'll also have a chance to reinforce your knowledge with a short quiz.

Types of Tax Structures

There are three general ways that a government can apply tax rates. Taxes can be levied on a regressive basis, a progressive basis or proportional basis. Let's take a closer look at each of these tax structures.

Regressive Tax Structure

A regressive tax structure results in low-income individuals paying a higher percentage of their income on taxes than high-income individuals. A regressive tax structure tends to shift the burden of taxation to the poor.

How a government defines the income subject to a particular tax rate or schedule is also important. For example, the United States government treats earned income differently than investment income and gives investment income a preferential tax rate. In other words, the government imposes a higher rate of tax on income earned through wages and salary than on income earned on investments. That's why Warren Buffet pays a lower rate of income tax than the average American household - most of his income is from investment activities, not from his labor.

Progressive Tax Structure

A progressive tax structure is the opposite of a regressive tax structure. In a progressive tax system, taxpayers making more money pay higher tax rates than those making less money. The United States uses a progressive income tax structure because it taxes earned income at progressively higher rates as earned income increases. A progressive tax structure tends to shift the burden of taxation to the wealthy.

Proportional Tax Structure

In a proportional tax structure, the tax rate does not depend upon the relative income level of the taxpayer. You can think of a proportional tax rate as a flat tax. A common example of a flat tax in the United States is a sales tax. The poorest member of society pays the same sales tax on a television as the richest. A proportional tax system theoretically should create an equal tax burden for all taxpayers, but some argue it doesn't.

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