Dual Rate Income Tax

What is a Dual Rate Income Tax

A dual rate income tax is an income tax rate structure in which two different tax rates are charged depending on income levels.

Breaking Down Dual Rate Income Tax

With dual rate income tax, all income will be taxed at the lower rate up to the cutoff income level, and all income above the cutoff point is taxed at the higher rate. This is similar to a flat tax structure but instead of just one rate, it has two.

A dual rate income tax is often proposed in combination with ideas for simplifying the overall tax system by eliminating most tax deductions and loopholes. For example, an income tax system using a dual rate structure may charge 20% on all income up to $100,000 and charge 25% on every dollar of taxable income above $100,000. Therefore, if you had an income of $150,000, your tax owed would be $32,500 ($100,000 x 20% + $50,000 x 25%).

Pros and Cons of a Dual Rate Income Tax

Proponents of the dual rate income tax argue that it is both simpler and more fair than the current federal tax code, which has seven different tax brackets following the tax reform of 2017. Proponents of the system have argued that along with moving from seven brackets to just two, Congress should eliminate most deductions and credits, further simplifying the tax code and freeing economic actors from spending so much time and energy preparing their taxes each year. Proponents also say that two rates is more fair, as it does less to penalize those who want to work hard and earn a lot of money. Furthermore, under most dual income tax proposals, the vast majority of American households would pay the lower, first rate, meaning that most families would send the same share of the their income to the federal government.

Critics of a dual rate income tax argue that it is regressive, meaning that it puts too much of the burden of funding the government on poorer Americans who can afford to pay taxes the least. In the above example, for instance, a family making $100,000 is paying the same share of their income in taxes, 20%, to the federal government as a family making $50,000. Dual-rate critics argue that the first family can much more easily afford the $20,000 it owes in taxes under this system than the $10,000 the second family owes. Therefore, this camp argues for more and higher marginal tax brackets, so to shift the burden of taxation more towards the rich.

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  1. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2022."

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