Tax Fairness: Definition & How It Matters?

KEY TAKEAWAYS

• Tax fairness is a concept and approach to help ensure that tax systems are equitable for everyone involved.
• Opinions differ on how to reach tax fairness, but they often fall into one of three categories. The categories are regressive, progressive, and blended taxation. 
• Many advocates for a progressive tax argue that the rich can afford to pay more taxes. 
• Many advocates for a regressive tax argue it’s the fairest approach since every individual taxpayer pays the same tax for various goods and services. 

What Is Tax Fairness? 

Tax fairness is exactly how it sounds. It’s a concept that outlines and describes how the tax system a government implements should be equitable for every taxpayer. With that said, there can be varying opinions on how tax fairness can be reached as a benchmark. 

Even though there can be many solutions to make tax fair for everyone, it typically falls into three categories of taxation. The three categories are blended taxation, progressive taxation, and regressive taxation.

What Are the Principles of Tax Fairness? 

While there aren’t any principles that are set in stone when it comes to tax fairness, there are some primary characteristics. These characteristics help establish a baseline for the tax to be as fair as possible for every taxpayer and society as a whole. 

A good and fair tax system should strive to meet some basic conditions. It should be fair, adequate, simple, and transparent. Any potential notion of fair tax should always balance what’s fair to society and what’s fair to an individual. 

Many fair tax advocates believe in closing certain loopholes that allow corporations and individuals to avoid paying certain taxes.

What Are the Different Fair Tax Systems?

Based on different advocacy, many groups focusing on the concept of tax fairness have narrowed the possibilities into three systems. They’re broken into progressive taxation, regressive taxation, and blended taxation. 

Let’s take a closer look at each of the fair tax systems, how they work, and their intended benefit.

Progressive Taxation

With this tax system, progressive taxes are designed to tax the rich more than a regular individual taxpayer. Essentially, the idea is to charge a higher tax rate on higher income amounts. Income tax in the U.S. is a progressive tax that can range all the way from zero percent to 37%.

However, someone that is wealthy doesn’t automatically pay the 37% tax. Instead, the highest percentage they have to pay gets levied on the amount of their income that exceeds a certain level. This, in essence, is exactly how progressive tax works. 

For example, an individual taxpayer that earned less than $9,950 in 2021 wouldn’t pay any tax. But, if that same individual earned an income between $9,995 and $40,525, they would pay a 12% tax. This amount increases based on the tax bracket. A person making $100,000 will pay 0%, on the first $9,950, 12% on the amount up to $40, 525, 22% on the next bracket and 24% on the remaining amount.

The main goal of progressive taxation is to charge a low amount of tax on those who are low earners and charge a higher tax on higher earners. It’s also worth mentioning that progressive taxes can also have various credits, deductions, and exemptions to help reduce the effective tax rate.

Regressive Taxation 

Regressive taxation is the method of charging everyone the same amount of tax. This is regardless of their ability to pay. In this scenario, low-income earners end up paying a much higher tax rate compared to those that are wealthy, when compared to disposable income. 

A perfect example of regressive taxation is a state sales tax. Consumers that earn very little pay the same amount of tax on milk compared to someone that’s in a higher tax bracket.

Blended Taxation 

As the name might suggest, blended taxation is a combination of progressive taxes and regressive taxes. For example, there are many states throughout the U.S. that implement a state-wide sales tax, but also have a progressive income tax. 

Another example is the federal government, which uses a progressive income tax except for the FICA payroll tax. This tax is a flat tax. Federal and state tax authorities help to shield those that are the lowest earners from high-income taxes.

Examples of Fair Tax

A good example of fair tax is to look at the progressive approach to taxation. A low-income earner would pay a tax that’s proportionate to their annual income. Whereas a high earner would do the same. 

For example, let’s say that Julia earned $25,000 in income last year. She would be subject to a 12% tax rate since that’s the tax bracket her income would fall under. Then, we have Carla, who earned over $100,000 in income in the same tax year as Julia. 

Since Carla earned a substantial amount more than Julia, she is going to pay a higher tax percentage because, justifiably, she can afford it.

Summary 

Tax fairness can mean something different depending on who you speak to. However, in general, tax fairness relates to how taxes get distributed fairly amongst individual taxpayers. In many ways, tax fairness is a system that should be equitable to everyone involved. 

Many governments and tax authorities use a progressive taxation approach, a regressive taxation approach, or a blended taxation approach. Progressive taxation can be fair since taxpayers pay a tax amount proportionate to their annual income. Lower earners are taxed less, and higher earners are taxed more. 

A regressive approach basically means that everyone — no matter your income level — pays the exact same tax. A common example of this is a state sales tax. Blended taxation combines both progressive and regressive approaches.

Written by Grant Gullekson

Grant Gullekson is a CPA with over a decade of experience working with small owner/operated corporations, entrepreneurs, and tradespeople. He specializes in transitioning traditional bookkeeping into an efficient online platform that makes preparing financial statements and filing tax returns a breeze. In his freetime, you’ll find Grant hiking and sailing in beautiful British Columbia. Learn more about Grant’s services at viccityaccountant.com.

Written by Grant Gullekson

Grant Gullekson is a CPA with over a decade of experience working with small owner/operated corporations, entrepreneurs, and tradespeople. He specializes in transitioning traditional bookkeeping into an efficient online platform that makes preparing financial statements and filing tax returns a breeze. In his freetime, you’ll find Grant hiking and sailing in beautiful British Columbia. Learn more about Grant’s services at viccityaccountant.com.