Understanding Taxes - Theme 3: Fairness in Taxes (2024)

Educational Standards

State and National Standards

Time Frame

One to four hours

Curriculum Area(s)

• Civics/Government
• Economics
• Technology

Purpose

To help students understand that progressive taxes can have different effects on different income groups

Objectives

Students will be able to

• define and give an example of a progressive tax.
• explain how a progressive tax takes a larger share of income from high-income groups than from low-income groups.

Background

Some forms of taxes are considered progressive. Progressive taxes take more from those able to pay more. Because this method is based on the ability to pay, it is considered the fairest means of taxation. People with higher incomes pay larger amounts of tax because their taxable income is larger. Thus, a greater portion of their income is paid to taxes; the tax rate increases as the taxable income increases.

The progressive principle, applied to our federal system of taxation, imposes a tax on wealth and income. Wealth includes assets such as houses, cars, stocks, bonds, and savings accounts. Income refers to wages, interest and dividends, or other payments. States, too, use progressive tax rates to tax the income of their residents. Inheritance taxes also use this progressive principle.

Key Terms

ability to pay

A concept of tax fairness that states that people with different amounts of wealth or different amounts of income should pay tax at different rates. Wealth includes assets such as houses, cars, stocks, bonds, and savings accounts. Income includes wages, interest and dividends, and other payments.

progressive tax

A tax that takes a larger percentage of income from high-income groups than from low-income groups.

Opening the Lesson

Print and distribute Info Sheet: How Progressive Taxes Affect Different Income Levels. Tell students that they represent all the taxpayers of a country called Progressia. Organize students into three groups representing low, middle, and upper income levels. Write $10,000 on the board, and assign one group that amount as an average income. Then write $50,000 on the board, and tell another group that they make about $50,000 a year. Finally, write $100,000 on the board, and tell the third group that they represent the country's higher-income taxpayers. Discuss with students the fairness of Progressia's income taxes to taxpayers in their group. Have them consider the amount of income taxes being paid by the other groups as well. Ask students to tell how the progressive principle reduces the burden on the lower-income group.

Next, tell students that a relative recently passed away and left them double the amount of their present income. Have each group calculate what the tax on their inheritance will be, based on the rates shown on the Info Sheet. Discuss why this kind of tax is based on the progressive principle. Ask students:

• At what level is the tax rate capped? $3 million
• How does the progressive rate help distribute inherited wealth? It takes more taxes from those who inherit the most money.

If students have completed Lesson 2: Regressive Taxes, have them tell how their income taxes, as shown on the Info Sheet, differ from the amounts they paid as citizens of Regressia. Discuss whether the distribution of taxes in Progressia seem fairer than the system used in Regressia.

Developing the Lesson

Have students suggest other tax rates that could replace those shown on the charts on the Info Sheet. Help students determine how much the three groups would pay by using the following formula:

Income x rate (percent) = amount of tax.

For example, $50,000 x 25% (.25) = $12,500.

Using the Info Sheet chart as a model, write the new taxes paid according to the students' suggested tax rates. Remind students that, although they may experiment with the tax rates as they wish, they must keep the tax progressive--the percentage of income paid in tax must increase as the amount of income increases. As students develop their suggested tax rates, ask how each would affect the three income groups.

• At what point do the rates become so high that people's lifestyles and businesses would be threatened? Answers will vary.
• If the owners of businesses could not afford to keep as many employees, how would the tax affect lower-income and middle-income groups? These groups might suffer because they could lose their jobs.

Concluding the Lesson

Ask students why a progressive tax is thought to be a good way to tax income. Discuss whether progressive taxes are also a good choice for other situations, such as property taxes.