This week, we are covering the three main types of tax systems: proportional, progressive, and proportional taxes. Even if you haven’t heard of these, you have probably heard of taxes that use these systems, like sales tax or income tax. The reason these matter is because they redistribute money in different ways and can either help or worsen income inequality (article on that next!).

Chances are, at some point or another, you have paid sales tax on something. As an example, NJ charges a nearly 7% sales tax on most personal property and even some services. Sales tax is an example of regressive tax, and here’s an example explaining why. 

Candy bar=$100 (it’s a lot, lets just say its a REALLY good chocolate bar)

Customer A makes $1000

Customer B makes $2000

7% of 100—>.07 x 100=$7 of tax

With a sales tax of 7%, both customers end up paying 107 dollars. For Customer A, this added sales tax is 0.7% of their income, and for customer B, it is 0.35% of their income. This disparity seems small, but with the hundreds of purchases that these customers will make, the disparity will become more impactful. This matters because regressive taxes place a much larder burden on lower-income households, which leads to greater income inequality.