An effective tax system is the backbone of a country’s financial stability. In many parts of the world, a discrete tax system is used. While it is efficient in doing what it is supposed to do, some wonder why the tax system is not continuous. If you are here, it means you are also one of them.
Experts debate on this and put forward points in favor and against these systems. When talking about leading economies like the USA, a discrete tax system is followed.
Wondering Why Do We Have a Discrete And Not a Continuous Tax System? Then you should look at some of the top-notch benefits of a discrete system described in this article!
Why Do We Have Discrete And Not Continuous Tax Systems?
In a discrete Tax system, different percent of the tax is applied on a particular income limit, which is also known as the bracket.
On the other hand, In a Continuous Tax System, tax is applied on how much money you earn continuously. There are no brackets and margins in this system.
The USA follows a discrete tax system because it is a good choice for citizens as they can save their money on it.
How?
For example, in a discrete tax system, you have to pay 22% tax on up to your 89,000$ income and 24% on 89,001$ and above. If you earn 88,999$ per annum, then only 22% tax will be deducted. One more dollar and the tax percentage will increase by 2% (1780$ more).
Plus, there are more chances of economic prosperity if there is a discrete tax system. To stay within a bracket, people invest or gift the extra income. This leads to a boom in business, which also makes society a better place.
Now, let’s have a look at how the discrete system charges federal tax in the USA!
Federal Tax For Single Filers
| Taxable income | Tax rate |
|---|---|
| <10,275$ | 10% of total income |
| 10,276$-41,775$ | 1027.5$+ 12% tax over 10,276$ earned |
| 41,776$-89,075$ | 4,807.5$+ 22% tax over 41,776$ earned |
| 89,076$- 170,050$ | 15,213$+ 24% tax over 89,076$ money |
| 170,051$- 215,950$ | 34,647$$+ 32% tax over 170,051$ earned |
| 215,951$- 539,900$ | 49,335$+ 35% tax over 215,951$ earned |
| >539,901$ | 162,718$+ 37% tax over 539,901$ earned |
Federal Tax When You Are Married And Filing Jointly
| Taxable Income | Tax rate |
|---|---|
| <20,550$ | 10% of total income |
| 20,551$-83,550$ | 2,055$+ 12% tax on amount over 20,551$ |
| 83,551$-178,150$ | 9,615$+ 22% tax on amount over 83,551$ |
| 178,151$- 340,100$ | 30,427$+ 24% tax on amount over 178,151$ |
| 340,101$- 431,900$ | 69,295$+ 32% tax on amount over 340,101$ |
| 431,901$- 647,850$ | 98,671$+ 35% tax on amount over 431,901$ earned |
| >647,851$ | 174,253$+37% tax on amount over 647,851$ |
As there are no brackets and margins in the continuous tax system, it is easily calculable. However, it is also a bit hectic in today’s economy as you have to keep a tab on the continuous flow of money and the tax rate keeps on increasing as you earn more money. Also, increase in tax rate is not as spontaneous in a discrete system as in a continuous tax system.
Long story short, here is why we have discrete and not continuous tax system:
- It provides a bit of relief to its citizens.
- It is easily manageable.
- To avoid crossing the limit, people make retailers or any other purchases which boosts the other businesses and the overall economy.
- More taxes are applied to the rich in a discrete system. As mentioned above, more than 30% tax is applied to those earning more than 170K per annum in the USA. Contrarily, the tax rate remains the same in the continuous system.
So, due to all of these factors, the US think tank adopted a discrete tax system over a continuous system!
For years I have studied American finance regulations. All the information in this blog is sourced from official or contrasted sources from reliable sites.
Salesforce Certified SALES & SERVICE Cloud Consultant in February 2020, Salesforce Certified Administrator (ADM-201), and Master degree in “Business Analytics & Big Data Strategy” with more than 13 years of experience in IT consulting.