Active fiscal policy promotes social equity, and the power of knowledge affects fiscal policy, while tax rate determines the wealth distribution, so that fiscal policy tightly links with social equity. Social equity concerns human happiness and social peace. It is suggested to promote social equity via active fiscal policy, and it is strengthened to follow closely the power of knowledge in this chapter. As social equity concerns human happiness and social peace, we may promote social equity via active fiscal policy.
TopTax Rate Determines The Wealth Distribution
The tax rate is key to determine wealth distribution, which is the percentage that an individual or corporation is taxed. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purposes as well.
Supposing that a firm produced and valued 10 billion dollars on the production side. If the government set the production tax rate at 10%, the firm would pay 1 billion dollars and then government taxation by increased 1 billion dollars. If the tax rate was set at 8%, the taxation would decrease by 200 million dollars and the firm could invest this amount to R&D for reproduction. Similarly, on the consumption side, when consumers received income from their firms, they might pay income tax or consumption tax during consumption. If there were 5 billion dollars for wage, with income tax at 10%, the government would receive 500 million dollars as taxation. However, if the tax rate reduced to 8%, the consumers could have an extra 100 million dollars for consumption or savings, so that the economy would be stimulated or promoted by consumption or investment. Therefore, we see that each 1% tax rate change would cause millions, even billions, in taxation change, which is to say: the tax rate might highly affect the economic behaviors of production and consumption as well as government taxation and investment.
The marginal tax rate used by the US government is indicative of its progressive tax system. Table 1 shows the marginal tax brackets for 2020.
Table 1. US federal income tax brackets and rates (2020)
| Rate | For Single Individuals | For Married Individuals Filing Joint Returns | For Heads of Households |
| 10% | Up to $9,875 | Up to $19,750 | Up to $14,100 |
| 12% | $9,876 to $40,125 | $19,751 to $80,250 | $14,101 to $53,700 |
| 22% | $40,126 to $85,525 | $80,251 to $171,050 | $53,701 to $85,500 |
| 24% | $85,526 to $163,300 | $171,051 to $326,600 | $85,501 to $163,300 |
| 32% | $163,301 to $207,350 | $326,601 to $414,700 | $163,301 to $207,350 |
| 35% | $207,351 to $518,400 | $414,701 to $622,050 | $207,351 to $518,400 |
| 37% | $518,401 or more | $622,051 or more | $518,401 or more |
Source: Internal Revenue Service. Form 1040 Instructions (2019), Page 104. Accessed Jan. 10, 2020.