Final answer:
True, an income shifting strategy requires taxpayers with varying tax rates to be effective. It leverages the progressive tax system to reduce the overall tax burden by legally shifting income to family members in lower tax brackets, which echoes the designed intent of the varying tax rates.
Step-by-step explanation:
The statement suggests that an income shifting strategy is utilized by taxpayers facing different tax rates, and this is indeed True. The essence of this strategy lies in taking advantage of the progressive nature of the tax system. When some family members are in lower tax brackets, income might be transferred to them, in lawful ways, so that the overall tax paid by the family is reduced. This is because in a progressive tax system, as one's income increases, not only does the total amount of tax increase, but also the percentage of tax paid on the next dollar earned (the marginal tax rate) increases.
For example, if a taxpayer earns a substantial amount of income and is therefore in a higher tax bracket, they could shift some of their income to a child who may be in college and typically falls within a lower tax bracket. Because the child's tax rate is lower, the total tax paid on this income would be less than if the parent had kept the income and paid taxes at their higher rate. It is important to remember that there are legal constraints and specific tax code provisions that govern these shifts.
Furthermore, this strategy is relevant to discussions about tax policies, where Keynesians and supply-siders may have differing views on how tax systems should be structured, but commonly acknowledge that progressive systems increase the effective tax rate as income rises. The United States, for instance, has several tax brackets ranging from 10% to 37% in 2023, with each bracket corresponding to different ranges of income.
In connection with the income shift strategy, it's noteworthy to mention the Laffer Curve, named after economist Arthur Laffer. He highlighted that under certain conditions, reducing tax rates can lead to increased tax revenue, primarily due to enhanced economic growth or reduced tax evasion.