Because taxpayers must pay the greater of either

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Unformatted text preview: n mind that the federal income tax cuts in 2001 and 2003 were made in the regular income tax, not in the AMT. Because taxpayers must pay the greater of either their AMT or regular income tax liability, the decline in regular income tax liability without any change in the AMT pushed many taxpayers into the AMT. In other words, what the regular income tax cuts gave with one hand were (for many people) taken away by the AMT with the other hand. QUESTION: Is everybody subject to the AMT, or only people above a certain income? ANSWER: Only persons above a certain income. In 2006, that income is $67,890 for a person filing jointly with two children. Section 1 Taxes 369 14 (364-389) EMC Chap 14 11/18/05 10:58 AM Page 370 proportional income tax An income tax that everyone pays at the same rate, whatever the income level. Proportional, Progressive, and Regressive Income Taxes progressive income tax An income tax whose rate increases as income level rises. Progressive income tax structures are usually capped at some rate. Income taxes can be proportional, progressive, or regressive. See Exhibit 14-3. Proportional Income Taxation With a proportional income tax, everyone pays taxes at the same rate, whatever the income level. For example, if Kuan’s taxable income is $100,000, she will pay taxes at the regressive income tax An income tax whose rate decreases as income level rises. EXHIBIT 14-3 Three Three Income Tax Structures Structures Proportional Proportional Progressive Progressive Regressive Regressive Same Same tax rate for every taxpayer. Tax rate taxpayer. Tax rate remains constant as as taxable taxable income rises. rises. Tax rate rises as Tax rate rises as taxable taxable income rises. rises. Tax rate falls as Tax rate falls as taxable taxable income rises. rises. Do you think that one of these types of income tax makes more sense or is more fair than the others? If so, explain. EXHIBIT 14-4 Countries with Flat Tax Countries with a Flat Tax Country Country Rate Rate Year introduced Year introduced Estonia Estonia 26% 26% 1994 1994 Lithuania Lithuania 33 33 1994 Latvia Latvia 25 1995 1995 Russia Russia 13 13 2001 001 Serbia Serbia 14 2003 2003 Ukraine Ukraine 13 2004 2004 Slovakia 19 19 2004 004 Georgia Georgia 12 12 2005 2005 Romania Romania 16 16 same rate as Arehart, who has a taxable income of $10,000. Suppose this rate is 10 percent. Kuan then pays $10,000 in income taxes, and Arehart pays $1,000. Notice that Kuan, who earns ten times as much as Arehart, pays ten times as much in taxes ($10,000 as opposed to $1,000). However, Kuan pays at exactly the same rate—10 percent—as Arehart. Sometimes a proportional income tax is called a flat tax, because everyone pays the same flat tax rate. Interestingly enough, many (but not all) countries that today have a flat tax system were once communist countries. In Exhibit 14-4 you will find a list of some countries with flat taxes. A common, but mistaken, belief is that a flat tax is necessarily a low tax. It does not have to work this way. For example, some people t...
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This document was uploaded on 01/16/2014.

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