Question

Can I get help with this question:

1. What are the 3 diff ways to measure tax rates?

a) what is the marginal tax rate?

b) average tax rate?

c) effective tax rate?

2. What are the three tax rate structures ?

a) what is a proportional tax (flat tax) rate structure?

b) What is a progressive tax rate structure?

c)What is a regressive tax rate struicture?

d) What are some examples of each tax rate structure?

3)What are two components of FICA taxes? how are they imposed?

a) how is the Fica tax imposed on self emplyed individuals?

Answer 1

Taxes are payments made by the citizens of the country to its government and it is used to pay for all government services provided in return. The government operates on the taxes provided by the people.

1. There are three different ways to measure tax rates: marginal tax rate, average tax rate and effective tax rate.

a. Marginal tax rate: it is the rate at which tax is charged on an additional dollar of income. The tax rate increases as the income increases and vice versa. Thus, low income earners will be charged at lower rates compared to high income earners. The taxpayers will be divided into tax brackets. The rate applicable to the taxpayer will be dependent on the tax bracket that he falls under. With increase in income, the additional amount will be taxed at the higher rates that the first dollar earned. The entire taxable income won’t be taxed at the same rate but are assessed on a progressive level. Each bracket has a particular range of income that will be taxed at a particular rate, and anything more than that range will be taxed at the rate applicable to the next range of income, and so on.

for eg: a person has taxable income of $50,000 in a year. His tax, as per US tax laws, will be calculated as follows:

Rate	For Singles With Taxable Income Over	For Married Filing Jointly With Taxable Income Over	For Heads of Household With Taxable Income Over
10%	$0	$0	$0
12%	$9,700	$19,400	$13,850
22%	$39,475	$78,950	$52,850
24%	$84,200	$168,400	$84,200
32%	$160,725	$321,450	$160,000
35%	$204,100	$408,200	$204,100
37%	$510,300	$612,350	$510,300

(9700 – 0) x 10% = 970

(39,475 – 9700) x 12% = 3,573

(50,000 – 39,475) x 22% = 2,315.5

Total tax = $6,858.5

The first $9700 is taxed at 10%, the next range from $9,700 to $39,475 is taxed at 12% and the next range from $39,475 to $50,000 is taxed at 22%. The total tax to be paid is the sum total of the above amounts.

b. Average tax rate: it is the percent of tax liability divided by taxable income. As seen above, people pay different tax percentages higher their income gets. Average tax rate gives the percentage of overall tax paid. The average tax rate will always be less than the marginal tax rate system. It is calculated by the dividing the sum total of taxes under each bracket by the total taxable income of the taxpayer.

For eg: in the above example, the taxpayer pays $6,858.5 as tax for $50,000. His average tax rate is

= (6,858.5 / 50,000) x 100 = 13.717%

c. Effective tax rate: effective tax rate is the average tax rate paid by the corporation or individual. It is the rate at which the income is taxed. The effective tax rate simplifies comparison between individuals or corporations. This is particularly useful in tax systems where there is a progressive tax rates.

2. The three tax rate structures are: proportional, progressive and regressive tax rate structures,

a. Proportional tax: it is an income tax system where all taxpayers are charged the same percentage of tax regardless of what income they make. The same rate of tax is applicable to all the taxpayers. They can be called as a flat rate tax system.

For eg: if the tax rate is set at 10%, a person making $10,000 will pay $1,000 as their tax liability, a person making $200,000 will pay $20,000 and a person making $600,000 will pay $60,000 as their tax liability. They all pay 10% of their respective income as the tax.

The same rate is applied to all irrespective of whether they are low income or high-income earners.

b. Progressive tax: it imposes a higher percentage of tax for higher incomes, and vice versa. It uses a marginal tax rate for calculating tax liability. The tax paid increases as income increases. Hence, low income earners, will have a lower tax rate applicable and high-income earner will pay a higher percentage as tax.

c. Regressive tax: it is a tax rate which is applied uniformly for all taxpayers irrespective of the income they make. for eg: sales tax, property tax, sin tax, etc. A regressive tax rate system affects individuals with low income more than those with higher income. This is because the tax amount they pay will come out to be higher percentage of their total earning as compared to some one with income.

For eg: take a hypothetical situation where person A and B both purchase an item for $100 and has to pay $10 as sales tax. Person A has an income of $1,000 and person B has an income of $10,000. The tax of $10 is 1% of the income of person A while it is only 0.1% of the income of person B.

It may seem fair to tax everyone at the same rate in certain situations, but can be unjust in other cases, as seen above. As a result, income taxes are charged at progressive rates while certain other taxes such as sin tax, sales tax, etc are charged uniformly.

d. Example of proportional or flat rate tax: payroll taxes

Example of progressive tax rate: income tax

Example of regressive tax: sales tax, sin tax, property tax

3. The Federal Insurance Contributions Act (FICA) is a federal law that requires employers to withhold three separate taxes from the salary or wages paid to employees. It comprises of the following components:

1. 6.2 percent Social Security Tax
2. 1.45 percent Medicare tax
3. Since 2013, a 0.9 percent Medicare surtax when employee earns over $200,000

The law requires the employer to make an equal contribution of 6.2 percent Social Security tax and 1.45 percent Medicare tax.

They are imposed by the employer withholding the mentioned amount of tax from their earnings, and paying the same to the Internal Revenue Service (IRS). It must also include the contribution from the employer. The payments have to be made semi-weekly or monthly depending on size of total employee payroll. At the end of each quarter, payroll taxes have to be reported using Form 941.

a. In case of self-employed individuals, the US government levies Self Employed Contributions Act (SECA). It requires the individual who is self employed to pay both the employer and employee portions of the Federal Insurance Contributions Act (FICA).

The individual has to pay 12.4% Social Security Tax, total of 6.2% employer portion and 6.2% employee portion, as he is both the employer and the employee. There are limits however, and is currently at $132,900 of net income. Any income above that is not taxed for Social Security Tax. The Medicare tax rate is at 2.9% (1.45% for employer plus 1.45% for employee), and there is no exemption above a certain income. In case of individuals with net income above $200,000, an additional Medicare tax is charged at 0.9%.