Progressive taxation is a system in which the tax rate increases as the amount of income increases. In other words, those who earn more money pay a higher percentage of their income in taxes than those who earn less. The idea behind progressive taxation is that those who can afford to pay more in taxes should pay more, in order to support social programs and reduce income inequality.
Regressive taxation, on the other hand, is a system in which the tax rate decreases as the amount of income increases. In other words, those who earn more money pay a lower percentage of their income in taxes than those who earn less. Regressive taxes are often criticized for placing a greater burden on lower-income individuals, who may have a harder time affording them.
An example of progressive taxation is the federal income tax in the United States, which has a graduated rate structure. The higher a person's income, the higher the tax rate they pay. The opposite example of this would be a flat-tax, which is regressive since all people pay the same rate regardless of their income.
A common example of a regressive tax is sales tax, as it takes a larger percentage of income from low-income individuals than it does from high-income individuals. Excise taxes, like gasoline or tobacco taxes, also fall in this category of regressive taxes, as they tend to have a larger impact on lower-income individuals because they must spend a larger percentage of their income on these goods.
It is worth noting that, depending on the specific tax structure, some people might consider a tax to be neither progressive nor regressive but proportional since the rate is always the same no matter how much you make.
There are 5 types of income that are reported on our tax returns in the United States.
Active income: This refers to income that is earned from actively working or providing a service, such as wages, salaries, and self-employment income. Active income is typically subject to higher tax rates than other types of income because it is considered earned income.
Passive income: This refers to income that is earned from investments or other sources that do not require active participation. Examples of passive income include rental income, dividends, and interest. Passive income is typically subject to lower tax rates than active income because it is considered unearned income.
Portfolio income: This refers to income earned from investments that are held for an extended period of time, and are not actively managed, it can be considered as a subcategory of passive income. It can come from interest, dividends, or capital gains.
Residual income: This refers to a stream of income that continues to come in even after the initial effort has been made. For example, royalties from a book you've written or commission from selling someone's product.
Unearned income: This refers to income that you receive without providing any service or labor in exchange. This can include social security benefits, investment income, and inheritance.
Pay attention to these forms on your tax return:
The U.S. Internal Revenue Service (IRS) uses Form 1040 to report an individual's federal income tax return. The line numbers on Form 1040 where you report various types of income will vary depending on the specific form you are using and the type of income you are reporting.
Here are the line numbers for some common types of income on the U.S. Form 1040:
Wages, salaries, and tips: These are reported on Line 1 of Form 1040. Your employer will also report this information on your W-2 form, which you will need to include with your tax return.
Investment income: Dividends and interest income are reported on Line 3a, while capital gains and losses are reported on Schedule D, which is then reported on Form 1040, Line 6.
Self-employment income: If you are self-employed, you will report your net income or loss from your business on Schedule C (Form 1040), which is then reported on Line 12 of Form 1040.
Rental income: Rental income and expenses are reported on Schedule E, which is then reported on Line 17 of Form 1040
Unearned income: This type of income is generally reported on Line 6a of Form 1040 for Social Security benefits and other unearned income.
It is worth noting that there are many different forms and schedules that can be included with Form 1040, and it might be necessary to consult a tax professional or the IRS for help in determining where to report specific types of income. It is also important to note that tax laws can change over time, and the line numbers may change as well.
The way in which active, passive, investment, residual, and unearned income are taxed can vary. In general, however, here is some information on how these types of income may be taxed:
Active income: This type of income is typically taxed at a higher rate than other types of income because it is considered earned income. This can include wages, salaries, and self-employment income. The exact tax rate will depend on your income level and the tax laws in your jurisdiction.
Passive income: This type of income is generally taxed at a lower rate than active income because it is considered unearned income. This can include rental income, dividends, and interest. T
Investment income: This type of income is considered as a subcategory of passive income, it generally includes interest, dividends, and capital gains, the tax rate may vary according to the source of income and the country or jurisdiction.
Residual income: This type of income is typically taxed like other passive income, but it may be subject to different rates or rules depending on the specific source of the income and the tax laws in your country or jurisdiction.
Unearned income: This type of income is generally taxed at a higher rate than passive income, as it is considered unearned income. The exact tax rate will depend on the source of the income and the tax laws in your country or jurisdiction, but it's often taxed as regular income.
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