What is a 'Progressive Tax'
A progressive tax is a tax that takes a larger percentage from high-income earners than it does from low-income individuals. The U.S. income tax system is considered progressive. In 2016, individuals who have under $9,275 of taxable income pay 10% in income tax, while taxpayers earning more than the benchmark cutoff of $415,050 fall into tax brackets with rates up to 39.6%.
BREAKING DOWN 'Progressive Tax'The progressivity of a tax structure depends on how quickly the tax rates rise in relation to increases in income. For example, if one tax code has a low rate of 10% and a high rate of 30%, and another tax code has income tax rates ranging from 10% to 80%, the latter is more progressive.
The Advantages of a Progressive Tax
Progressive tax systems reduce tax burdens on people who can least afford to pay them, and these systems leave more money in the pockets of low-wage earners, who are likely to spend all of their money and stimulate the economy. Progressive tax systems also have the ability to collect more taxes than flat taxes or regressive taxes, as tax rates are indexed to increase as income climbs. Progressive taxes allow the people with the greatest amount of resources to fund a greater portion of the services all people and businesses rely on, such as roads, first responders and snow removal.
Disadvantages of Progressive Taxes
Critics of progressive taxes consider them to be discriminatory against wealthy people or high-income earners. These critics believe the U.S. progressive income tax is effectively a means of income redistribution, based on the myth most taxes are used to fund social welfare programs. However, only a small portion of government spending is devoted to welfare payments.
Difference Between Progressive Tax and Regressive Tax
The opposite of a progressive tax, a regressive tax, takes a larger percentage of income from low-wage earners than it does from high-wage earners. Sales tax is an example of a regressive tax because if two individuals buy the same amount of goods or services, the sales tax constitutes a higher percentage of the lower-earning individual's wages and a lower percentage of the higher-earning individual's wages.
Difference Between Progressive Tax and Flat Tax
Unlike progressive and regressive tax systems, a flat tax system does not impose different tax rates on people with different income levels. Instead, flat taxation imposes the same percentage tax on everyone regardless of income. For example, if everyone is taxed at 10%, regardless of income, this is a flat tax.
The U.S. payroll tax is often considered a flat tax because it taxes all wage earners at the same percentage. However, as of 2016, this tax is not applied on earnings over $118,500, and as a result, it is only a flat tax for people earning under that amount. Taxpayers earning over that amount pay a lower percentage of their total income in payroll tax, making the tax regressive.