Chapter 16, Problem 22AA

To determine

To explain:The way in which only half the taxpayers are able to pay most of the taxes.

Explanation of Solution

The progressive tax system is based on the principle of ability to pay. This means that an individual earning a higher income has to pay a higher percentage of income. The proportion of tax to be charged increases with an increase in income.

It was seen in the records of IRS that 50% of top earners paid almost 96.5% of total federal income and the bottom 50% of earners paid only 3.5% of federal income tax. As the tax is charged based on a progressive tax system, the rate charged on top earners is high and more amount is collected by them in form of tax. People whose taxable income was more than $336,550 has to pay $97,653.50 and 35% of income more than $336,550 as per the slab of 2006. In this manner, a heavy amount of tax is paid by top earners. The bottom 50% of earners have less income and hence tax rate charged is lower. The amount collected by them hence is less and does not amount more in the federal income.