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Tax Incidence The term tax incidence focuses our attention on the individuals and groups that actually bear the burden of a tax. Consider taxes on tobacco products. Who pays? In other words, what is the tax incidence of cigarette taxes?

Who pays tobacco taxes? Do all groups pay equally? Who pays more? Who pays less?

Progressive Taxation A progressive tax is designed to shift the burden of a tax toward those people with a greater ability to pay and away from those people with a lower ability to pay.

Income Taxes Income taxes can be constructed to have a progressive incidence. For example, California assesses a state income tax with rates ranging from 1 percent to 13.3 percent. An individual with $10,000 in taxable income would pay a tax of 4 percent. An individual with an income of $100,000 would pay 9.3 percent.

Sales and excise taxes are considered regressive because lower-income people spend a greater proportion of their earnings on items that are taxed than do upper income people. Regressive Taxes A regressive tax tends to reduce the tax incidence of people with higher ability to pay, as they shift the incidence disproportionately to those with lower ability to pay.

Sales Tax Incidence

The big difference between California and Texas is that California has an income tax whereas Texas does not.

Texas Tax System The Texas tax structure is regressive because of its heavy reliance on sales and excise taxes. A family earning $12,100 a year pays 14.2 percent of its income in state and local taxes. In contrast, a family with an annual income of $177,800 pays just 5.1 percent of its income in taxes.

Lottery is regressive, too Texans earning less than $20,000 a year spend on average nearly twice as much on the lottery as those people who earn $50,000 to $59,000--$76.50 compared with $39.24 a month. High school dropouts spend more than three times as much on the lottery as Texans with college degrees.

Tax Fairness People disagree about the best tax system.

Liberal approach Some people favor a tax system based on the ability-to-pay theory of taxation, which is the approach to government finance that holds that taxes should be based on an individual's financial resources.

Conservative Approach Other people think that government should keep taxes low, especially taxes on business and people with high incomes, in order to encourage investment and business expansion.

Policy options People who want to make the Texas tax system “more fair,” however defined, offer competing proposals. A personal income tax Expanded legalized gambling Repeal of the franchise tax Elimination of the property tax Increase in the sales tax Broaden and increase the sales tax

What You Have Learned What does the term tax incidence mean? What is a progressive tax? What is an example of a progressive tax? What is a regressive tax? What are some examples of regressive taxes? Is the Texas tax system progressive or regressive? Why? What are the arguments for an against each type of tax system? What are the options for making the Texas tax system “more fair”?