What Is Tax Fairness?

Tax fairness is a concept which stipulates that a government's tax system should be equitable to all citizens. Opinions differ, however, in just how to reach tax fairness.

The solutions are varied, but most fall under three broad systems of taxation. They include regressive taxation, progressive taxation, and blended taxation.

Key Takeaways

  • Advocates of a regressive tax say it is fair because everyone pays the same tax for the same goods and services.
  • Advocates of a progressive tax say the richest can afford to pay more into a system that has benefitted them more.
  • Taxation in the U.S. takes a blended approach. The income tax is progressive while the FICA tax is regressive.

Generally, advocates of tax fairness believe that taxes should be based on a person's or company’s ability to pay but balanced by the needs of society as a whole for government services.

Understanding Tax Fairness

Any notion of tax fairness attempts to strike a balance between what is fair to the individual and what is fair to society as a whole.

The Individual's Right

A tax regime that emphasizes fairness to the individual will allow its citizens to keep most of the money they make or the wealth they own because it is, after all, their property. However, such a tax regime tends to have many exemptions for special cases, created in response to interest groups that make a case for special tax treatment.

Theoretically, the most deserving individuals will pay the least tax, but there may not be a consensus on who are the most deserving. Some would cite the poorest and most disadvantaged. Others may point to the richest who are most able to benefit others by spending money and creating jobs.

The Common Good

A tax regime that focuses on the good of the society as a whole might conclude that a primary function of the tax code should be the redistribution of wealth. For example, generational wealth may be taxed by a high inheritance tax, or high earners may be taxed more to bring their pay in line with other workers.

Most advocates of tax fairness tend to advocate for closing loopholes in the tax code that allow certain individuals and corporations to avoid paying taxes altogether, although every one of those loopholes is strongly defended by individuals or groups who believe they deserve special treatment.

Three Tax Concepts

Groups that focus on tax fairness generally choose one of three possible tax systems. These systems are regressive taxation, proportional taxation, and progressive taxation.

Regressive Taxation

Regressive taxation taxes everyone the same amount, regardless of their ability to pay. As a result, the poor pay a much higher rate than the rich as a percentage of their disposable income.

A state sales tax is an example of this type of taxation. The poorest consumer pays the same amount of tax for a gallon of milk as the richest person.

A flat tax is often characterized as a regressive tax. For example, imagine a tax system that imposes a flat 15% income tax and no other taxes. A family with an income of $180,000 will pay $27,000. A family with a $30,000 income will pay only $4,500. However, when considered as an issue of tax fairness, the lower-income family may be getting the lesser deal. The family's real standard of living has been compromised while the richer family is untouched.

Progressive Taxation

Progressive taxes charge a higher tax rate on higher amounts of income. The U.S. income tax is a progressive tax, with rates ranging from 0% to 37%.

Contrary to popular opinion, this does not mean that a rich person pays 37% of his or her income in taxes in the U.S. That highest percentage is levied only on the amount of the person's income that exceeds a particular level. That is how a progressive tax works.

As of the 2021 tax year, all individual taxpayers pay zero on the first $9,950 in income. The individual must pay 12% on income from $9,951 to $40,525, and so on through the tax brackets.

The intention of a progressive tax rate is to charge an effective tax rate that is lowest on the lowest earners, and higher on the higher earners.

Progressive taxes may also have exemptions, deductions, and credits that reduce the effective tax rate on certain groups of taxpayers, such as parents with dependent children, or rewards certain behaviors, such as saving for retirement or donating to charity.

Blended Taxation

In practice, most tax authorities blend regressive taxes and progressive taxes.

Many states have a state-wide sales tax but also have a progressive income tax.

The federal government has a progressive income tax, with the exception of the FICA payroll tax, which is a flat tax.

And, both state and federal tax authorities shield their lowest-income residents from income taxes.