so the government needs to design a tax system that's going to be efficient, but that it's also gonna be fair, Let's discuss tax equity in this video. So tax equity, it deals with the fairness of the tax system, right? It helps us answer these types of questions like, how should the tax burden be divided? How do we judge if it's fair? So we're going to discuss two main principles when it comes to tax equity. The first one here being the benefits principle. So the benefits principle says that people who receive the benefits, if you receive the benefits, you should pay the taxes right? If you're gonna receive the benefit, you should pay the tax. So, there's a couple examples here, The first one being a gasoline tax. This is a very common, uh, tax example for the benefits principle. So what's the benefit of the gasoline tax? They're gonna put a tax on gasoline and then they're gonna use that money to fix roads, right? They might, they might use the tax revenue to fix potholes, right, maintain the roads in general, and who's gonna pay for it? Well, the people who use the roads, right? The people who drive are gonna buy gasoline. Maybe not if you have a Tesla, but in general, people who drive, are going to pay for the gasoline and that money is going to be used to fix the roads and maintain the roads. Another example here is a marina. So if there's a marina, a tax for using the marina. Well, what's the benefit? Maybe they'll raise this tax revenue and they will maintain the waterways, right? They'll maintain the waterways. It's common here in Miami for people who own boats and stuff like that, maybe I'll join them one day. Uh, So the marine attacks people who use the marina, who dock their boats at the marina. They're gonna pay a tax and that money is gonna be used to maintain the waterways clean the ocean. So who's gonna pay it? The people who use people with boats, Right? People with boats who use the waterways, they're gonna pay that tax. So this follows the benefits principle, right? Who is benefiting from the tax is paying the tax? Cool. Nothing too crazy there. Let's talk about the next one. The ability to pay principle. So this is that people who should, the people who should pay taxes, uh they should, sorry, they should pay taxes based on how easily they can afford it. Right? So this in general means that if you have a lot of disposable income, well, you should have a little bit extra to pay more taxes, Right? So poor people should not have to pay as much tax because it's gonna be more of a burden to them. They're gonna have to sacrifice more to pay some taxes here. So the idea about the ability to pay is that you should make an equal sacrifice to pay taxes. So, let's look at these three different situations, the first person, they're making $10,000 and they have to pay $1000 of tax, right? So this is $1000 tax on 10,000 of income. So we would say they're paying about 10% of their money in taxes. So what's their disposable income? This is the money they have left after they pay taxes. Well that's gonna be the 10,000, I'll put 10-K minus 1001 K. That leaves them with 9000 and disposable income. Right? So notice they're still paying taxes. Um But they only have 9000 left in disposable income. Now what if someone with $50,000 only had to pay $1000 of tax? So now $1000 of tax on 50,000, They're only paying two Of their money and taxes. Right? So their disposable income? Well they have 50,000 and they only have to pay 1000 in tax. They're left with 49,000 of disposable income. And we could say that they have a lot more disposable income here, right? That 1st 9000 that the previous person had. Well, they're probably gonna have to spend that on rent on food while this person, if they spent the same amount they still have another 40,000 left over now. What about a $10,000 tax on 50,000 of income? So 10,000 on 50,000 notice here, they're paying 20% in taxes. But how much disposable income are they left with they've got 50,000 minus to 10,000, they're still left with 40,000 in disposable income, right? So even though they're paying a lot more taxes, they're paying 10,000 while the first person is only making 10,000, they still have a lot more disposable income, right? They still have a lot more luxuries they can afford, even though they ended up paying more taxes. So what this does is it suggests that more taxes should be raised from people with higher incomes than lower incomes. Okay. That's what the ability to pay principle says. Because when you're not making a lot of money, it's a big sacrifice to pay a lot of taxes, right? Because you don't have a lot of money to begin with. When you have a lot of money, Well, you can sacrifice a little more and it's not as big of a deal to you. Okay. So what this is called this principle, the ability to pay principle, It goes hand in hand with what we call vertical equity. The taxpayers with higher income pay more taxes, right? As you make more money. You should pay more taxes. This is vertical equity, right? You can afford more taxes because you're making more money. Now, let's compare that to this other idea of horizontal equity. So this is the idea that people in the same economic situation should pay the same amount of taxes. Notice vertical equity, we're talking about Equity going up and down the line of people making more money should pay more taxes because they can afford it. However horizontal is people in the same situation should pay the same amount of taxes. So let's look at these two people, this is this is kind of an ethical question here. Look, the sick family. So we've got the sick family, they're earning $100,000. They have no Children and they pay $40,000 in medical expenses. While the school family, they also earn $100,000. They have four Children and they pay $60,000 in tuition. So, notice it's very difficult to have horizontal equity here, right? Because they're not in very similar situations, but they're both burdened in similar ways, right? They still, while the sick family, their problem is that they have a lot of medical expenses, the school family, well, they have a lot of school expenses, right? They have a lot of tuition expenses. So are they in the same economic situation? Not really. But how do we, they're both still burdened quite a bit here. Right. So which one of them should receive a tax break? These are those ethical questions that come into play when we design a tax system, right? Should there be a tax break? Because they have a lot of medical expenses? Should there be a tax break? Because there's a lot of tuition expenses, right? These are the questions that need to be answered when designing a tax system and that's how we deal with the horizontal equity. Okay, so let's pause here and we'll discuss, um, the three types of taxes here, uh, that, that we'll see in the next video, the regressive, proportional and progressive tax. Cool, Alright, let's go ahead and do that in the next video.

So now let's discuss some tax systems where we're gonna see increasing taxes as you make more money. Now, the first one, the regressive tax system, the tax rate actually decreases as income increases in the most. In most cases, this still generally ends up in higher taxes paid. But if if it's regressive enough, if the tax rate is decreasing enough, it actually ends up where they're paying less taxes, where people making more money are paying less taxes, right? And obviously that wouldn't follow the tax equity principles we've been discussing so far, but we'll see what a regressive tax looks like the next one of proportional tax. Well, proportional the tax rate is gonna stay the same, it's gonna stay proportional as income increases and a progressive tax. This is more what we have in the usa the usa has a progressive tax system and that's where the tax rate increases as income increases. So that's something where the first bit of money you make is taxed at a certain percentage. And as you make more money, the percentage is gonna keep increasing. Okay, so let's go ahead and discuss uh these three different systems here. So we're gonna see three incomes, someone making $50,000 100,000 dollars and $200,000. Okay? And let's discuss a regressive tax. So in the first situation we're going to see that there's going to be a regressive tax where there's gonna be 20% tax and then notice regressive it's going to be decreasing as you make more money, 15% tax. And then 10% tax as you get up in in income. Right? As the income increases, the tax rate is decreasing. So how are we gonna calculate these taxes? Well, we've got a very simple tax system here. So we're just gonna have to multiply across here. We'll multiply the tax rate times the income. And that's going to give us the amount of taxes paid. So the amount of tax for the 50,000, if they're paying 20% 50,000 times 20% that's 10,000 in tax is 100,000 times 15%. That comes out to 215,000 times 10%. Well, 200,000 times 10%. That's 20,000 notice that the amount of tax is increasing still, right? It's because they're making more money. And even though they're paying a less percentage, that amount of taxes still increasing. Now, if these percentages have been different. Yes, we could have had a situation where the 200,000 person was paying less taxes than the 100,000. But in general, this is how we're gonna see how these tax rates flow. Okay, now, proportional tax. Now, the tax rate is gonna be the same for everybody. So, if everyone had a 15% tax rate, right? The middle tax rate year that 15% for everybody. Well, notice that although you're making more money, you have to pay more taxes because you're still paying taxes on all that extra money you're making. So 50,000 times 15 That comes out to $7500 here, 100,000 times 15%. That's 15,000 in taxes. And finally 200,000 times 15%. That's 30,000 in taxes. So there you go, you see the taxes increasing. Well, they made more money and they're paying that same 15% on the more money they made. So naturally they're gonna have to pay more taxes and now a progressive tax system. So notice this is like the opposite of the regressive tax system. In this case, we're gonna have the 10 here for the 50,000 earner, 15% and then 20%. So as you make more money, you're gonna have to pay a higher percentage of your income. So the 50,000 times 10% they're gonna pay 5000 in taxes, 100,000 times 15%. They're gonna pay 15,000 And finally the 200,000 times 20% that goes up to 40,000. But remember this, this goes with the discussion of the ability to pay, right? Although they have a lot more money and they're paying more in taxes, they still end up with more disposable income, right? They have a lot more money left over after they pay taxes. So this is the discussion on tax Equity, right? It usually comes down to that, that idea that as you make more money, you should pay more taxes because you have the ability to make the sacrifice while still having plenty of disposable income left over. Cool, So that's the idea of tax equity. Let's go ahead and move on to the next video.