This paper examines the differences between progressive and regressive taxation. It explores, within the progressive-regressive paradigm, the essence of a range of taxes in the United States, including personal income, earned income, real estate taxes, and lottery taxes. It also reports the taxes that are utilized to fund Paterson School District in Passaic County, state New Jersey. Finally, it compares the patterns of taxation and amount of revenues on each level in Paterson with those in a school district from a neighboring state.
Differences between progressive and regressive taxation may be explained by the way taxes are defined: the income percentage that has to be spent is different. Progressive taxation is when people who get higher income must pay bigger percentage to cover the tax. In other words, the progressive tax will take higher income proportions with the rise of an individual’s income. Regressive taxation, which is the opposite to the progressive one, absorbs lower proportions of an individual’s income with its rise (Lipsey & Harbury, 1992, p.230).
In the United States, earned income tax is known to be progressive. For instance, back in 2010, people who earned $8,375 and less were referred to the tax bracket of 10%, whereas those whose earned income was more than $373,650 were referred to the tax bracket of 35%. Taxpayers are generally divided into categories that are based on their taxable incomes: people who earn bigger sums pay higher taxes when they reach the benchmark points that are fixed between different levels of tax brackets (Investopedia, n.d.).
Progressive taxation also includes a real estate or ad valorem tax. Ad valorem tax (which is literally translated as “according to the value”) is a tax which is imposed on property and computed with reference to the property value. It is also referred to as property tax (Evans & Evans, 2007).
Further, the progressive taxation in the United States includes a personal income tax. It is calculated in the following way: people pay higher percentage of their income from salary, wages, winnings in gambling, etc.
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The lottery revenue tax is believed by the majority of experts to be a regressive tax (Kramer, 2010). Regressivity, as Hansen explains, is about measuring of the individual’s income percentage that he or she spends on taxes (Hansen, 2006). For example, someone with an annual income $15,000 buys $3,000 worth of tickets of the lottery. It means that they have spent 20% of their income on the lottery. For those who earn 150,000 annually this sum will be only 2% of their income (Hansen, 2006).
Sales tax is regressive. It is a tax that is paid for selling goods or services by a seller. It is typically taken from consumers at the moment of the goods’ purchase.
Paterson School District, just as other school districts in New Jersey, is funded with a blend of local property taxes and aid from the state which is based on income and sales taxes. . On the state level, the source of this funding is income and sales taxes plus lottery revenues, while on the local level, the school gets funded by property taxes. The latter are set by local officials, the school board, and citizens (PBS, 2008). The local revenue, which is primarily funded by property taxes, is around $45,987,000 annually; the state revenue, which is majorly funded by income and sales taxes, is $490,594,000 (Paterson Public Schools, 2013).
The data published in the Fiscal Report for year 2011 show that in the years 2010 and 2011 property taxes, namely $39 million, accounted for about 7 per cent of Paterson Schools overall revenues. It means that revenues obtained from State and Federal aid accounted for as many as 92 per cent.
A different revenue combination may be found in the distressed Chester-Upland School District in Pennsylvania. Operating in poor neighbourhood, the school district majorly depends on state aid. Cuts-off by the state authorities have led to an appalling crisis, with 40% of school staff being laid off, while others agreed to work for free for some time (Strauss, 2012). From the Table 1 below, one gets to know that the revenue from the local sources (i.e. property taxes or real estate tax) amounts to $22,799,000. Revenue from state sources (funded by sales and income taxes) is as high as $57,989,000. Federal sources revenue (or federal aid) covers $9,690,000. To compare with Paterson School District, local revenues are almost twice lower, state revenue is 8,5 times lower (approx. 491,000, 000 versus approx. $58, 000, 000), and federal aid is more than 4 times lower ($38, 000, 000 for Paterson vs $9,700, 000 for Chester-Upland). In percentage, Paterson School District gets only 7 per cent of it profits from real estate taxes; Chester-Upland school district gets 25 per cent of its profits from the property taxes.