Tax characteristics and structures

0:00- [Narrator] In other videos, we talk about how anything that a government needs to do, it ideally needs to pay for it. And the way that it tends to pay for it is with some form of tax. Now, we're not gonna go into detail on the tax code, but we're gonna talk about the characteristics that we might want as a society of our taxes and different ways we can think about structuring them.

0:21This right over here is a picture I asked an AI to create an image, an abstract image representing taxes, and this is what it did. So I just thought it was kind of nice to look at. As we think about tax characteristics and structures. So what are the properties, first of all?

0:36Well, you want it to be efficient, and that means that the process of evaluating taxes and collecting taxes by the government should not take a lot of resources. In fact, that would waste some of those taxes that you're collecting if it did. You also want it to be simple.

0:55And unfortunately, taxes, especially things like income taxes are not so simple, but you want, especially in the United States, but you want them to be as simple as possible, so that people don't have to spend a lot of time and energy figuring out what their taxes are.

1:10And there's also an argument that the more complicated it becomes, the more ways that people might try to game it, or there might be certain loopholes. Now, you also want certainty. You want people or entities like corporations to be able to understand what their taxes are likely to be.

1:27If the tax code changed dramatically every year and you had no predictability, no certainty of what you might pay the next year, it would hurt your ability to do things like invest or start a business or just plan for your finances if you didn't know what your taxes are going to be.

1:42So it's good to have certainty. And then some would argue, or many would argue that equity is also a very important part of it. Now, there's a lot of different ways of interpreting equity, and this is why you have debates in the public sphere. Some people would argue that those with more resources should pay, not just more in absolute dollar terms, but maybe should pay a higher percentage.

2:05And we'll talk about that. While other folks would argue that everyone should pay the same percentage, other people might even argue that people should pay for what they use, so to speak, from the government. And then others would argue that, well, the taxes should never be so burdensome that they hold people back in some way.

2:26So we could think more about what this is, maybe in other videos or it's actually an interesting thing to talk about with your family or with your friends. Now, what are different ways of structuring the taxes? And that goes to this idea of equity. And generally speaking, there's three ways of doing it.

2:44There's progressive taxation. There is flat taxation. And there is what people would consider regressive taxation. Now, in both progressive and flat taxation, if someone makes more money, they pay more in absolute dollar terms. But in a progressive tax code, the more you make, the higher percentage you pay.

3:12So as your income goes up, well then that leads to not just the dollar amount that leads to the percentage going up. In a flat tax system, you have a flat percentage. So percentage is flat, but that still means, not flate, flat, but that still means that as your income goes up, your dollars that you're paying still go up.

3:41They just won't go up as much as when you're thinking about the percentage increasing. And then an regressive tax code or tax structure, you have a situation where as your income goes up, it's not necessarily the case that you pay less in dollar terms, but you could pay less in percent terms.

4:06So let's think about a few examples here. Let's imagine that there is person A and person B, person A and person B. Let's say that person A makes $100,000 a year. So this is income. Person B makes $1 million a year, 1 million. Maybe I should write it as 1,000K, just to keep it consistent.

4:35Makes 1,000K or a million dollars a year. Actually, lemme just write 1 million, $1 million a year. Now if we had a, let's just start with the flat tax, 'cause that might be the simplest to think about if you just had a say 10% flat tax on income, well then you're going to have a situation where person A pays 10,000 a year in taxes and person B would pay 100,000.

5:06So notice the flat tax is flat in percentage, but person B is still paying more absolute dollars in person A. Now, if you had a progressive system and a progressive system tends to be a little bit more complicated than what I'm talking about. A lot of people think that as your income goes higher, you pay a higher percentage on all of the money, but it turns out in a progressive code, there's levels at which you pay a higher percentage on each incremental amount.

5:35So a progressive system, let's say you pay 10% on first 100K, and then you pay 20% on the rest. This isn't the actual tax code, but this would be a progressive tax code. So in this situation, person A is going to spend 10,000 on the first 100K. Well, they are making 100K, so they're going to spend $10,000 per year on their taxes.

6:03And these are all income taxes that I'm talking about. While person B, they're going to spend that 10,000 on their first 100,000 that they're making. And then on the other 900,000, they're gonna be taxed at 20%. So that's going to be plus another 180,000. 180K.

6:21So this person is paying 190,000. And so you can see even the way we've structured it here, this person's paying 10% of their income, this person is paying 19% of their income when you mix everything based on the different brackets, and this is actually much closer to how our current income tax system works.

6:41It is a progressive tax code where as you cross certain thresholds, that increment of money gets taxed at a higher and higher rate. So what would be a example of regressive tax? Well, a regressive tax is usually not based on income. It might be based on something like spending.

6:59So let's say, it is a tax that is, let me go over here. So let me give a regressive example or what people would consider regressive it... Let scroll up a little bit. It could be say 10% on expenditures, expenditures, things like a sales tax could be considered something like this.

7:20And so then we wouldn't look at this person's income. We would look at what they are spending. And so let's say person A, let's say they both spend 100K, so to live, they both spend 100K, spend 100K a year. So in that situation, they both would be taxed. Let's say this is a sales tax.

7:40They both would pay $10,000 a year in sales tax, which is 10% of person A's income, and that's only 1% of person B's income. So in this situation, person B is paying a lower percentage. So I will leave you there. You are now armed with at least high-level ways of thinking about taxes and ways that you can structure them.