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Personal Finance

Who pays the highest taxes?

Who pays the highest taxes depends on the type of the tax system followed in a particular place. In a progressive tax system, the higher your income, the higher will be the tax rate. In such an equation, both the low incomed and the wealthy are taxed accordingly. But in regressive taxation, the tax rates are flat and it squeezes more of the middle or lower income group than the rich. Hence the tricky question “who pays the highest taxes” has a direct bearing on the taxation type followed in each state.

Studies have shown that only eight of the states in US mandate their well off citizens to pay equal or at a higher rate of taxes than shelled out by the middle income families. Further, just four states have a taxation regime that levies the wealthiest same or higher percentage than the poor. But the fact is that the difference in payment between the well off and the poor is not so trivial. It needs immediate attention.

In United States, ten states – especially Washington, Florida, Illinois, Alabama, Texas, South Dakota, Tennessee, Louisiana, Pennsylvania, and Michigan – are regressive in their taxation particularly. In these states, poor people – at the bottom 20% of the income scale – are asked to cough up 2-4 times as great a share of their income as taxes while the middle income families need to shell out 1.5-3 times as great a share of their earnings, both against the share of the wealthiest lot.

But this is not an issue with income tax alone, but is a collective effect of all forms of taxes. For example, while Washington has been touted as a no-income tax state, the poor people residing in the state are forced to shell out 17.2% of their overall earnings. In it ironical that this ‘no income tax’ state has the highest taxation rate imposed on the poor. Remember, the adjoining states of Oregon and Idaho as 9.2% and 10.9% respectively.

The scene is not different in the other no-income tax states of Florida and Texas as well. The rates in these states are 14% and 13.8% respectively and the burden is almost entirely on the poor and the middle class while the rich enjoy lesser taxes.

The disparity in the taxation across various classes in these states is due to the absence of a broad based personal income tax and that some states depend heavily on excise and sales taxes.

Generally, it is found that personal and corporate income taxes are the core progressive element of state and local tax systems. The property tax and sales and excise taxes are regressive.

Till date, state and local governments focused to tax the poor and the middle income group more than the rich who actually can afford the tax. It is up to the state to decide whether to bring a sort of change into the whole system or to pay for the new services in the same way as did earlier – regressively. Whichever be the case, the path each state chooses will have a big impact on the lives of a common man.