Loading the player...

What is a 'Progressive Tax'

A progressive tax is a tax that imposes a lower tax rate on low-income earners compared to those with a higher income, making it based on the taxpayer's ability to pay. That means it takes a larger percentage from high-income earners than it does from low-income individuals.

BREAKING DOWN 'Progressive Tax'

A progressive tax is one that charges a higher tax rate for people who earn a higher income. The rationale is that people with a lower income will usually spend a greater percentage of their income to maintain their standard of living. Those who are richer can typically afford the basic necessities in life (and then some). 

The income tax system in the United States is considered a progressive system.

The degree to how progressive a tax structure is 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 percent and a high rate of 30 percent, and another tax code has income tax rates ranging from 10 to 80 percent, the latter is more progressive.

The Advantages of a Progressive Tax

Progressive tax systems reduce the (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 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.

The current tax system in the United States, which was signed into law in December 2017 and went into effect as of January 2018, has seven different tax rates or tax brackets based on income and filing status (single, married filing jointly or heads of households). These tax rates are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. 

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.

Progressive Tax vs. Regressive Tax

The opposite of a progressive tax, a regressive tax, takes a larger percentage of income from low-wage earners than from high-wage earners. A 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.

Progressive Tax vs. 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 percent, 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 less than that amount. Taxpayers earning more than that amount pay a lower percentage of their total income in payroll tax, making the tax regressive.

RELATED TERMS
  1. Regressive Tax

    A regressive tax is a tax that is applied uniformly, resulting ...
  2. Proportional Tax

    A proportional tax is an income tax system that requires the ...
  3. Tax Fairness

    Tax fairness is a tax system that aims to create a system of ...
  4. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  5. High-Income No Taxes (HINT)

    High-Income No Taxes (HINT) refers to high-earning taxpayers ...
  6. Tax Break

    A tax break is a savings on a taxpayer's liability. It is also ...
Related Articles
  1. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  2. Taxes

    Which Countries Have High Taxes on High Incomes?

    For high earners in these countries, the tax rate percentage on income exceeding a certain threshold can reach into the high 50s and low 60s.
  3. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  4. Insights

    A Concise History Of Changes In U.S. Tax Law

    We look at how U.S. taxes have changed since their inception.
  5. Taxes

    Taxes: Who Pays And How Much?

    When it comes to taxes, the debate is endless on who pays what, especially in Congress. With no new initiatives in sight, let's take a look at who is paying now.
  6. Taxes

    Breaking Down Taxes For Different Income Brackets

    Here is a useful rundown of how much you will pay in taxes based on your income.
  7. Managing Wealth

    How Trump Tax Plans Will Aid Wealth Building for the 1%

    President-elect Trump's proposed tax plan includes tax breaks that may offer some generous benefits to higher-income earners.
  8. Taxes

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
  9. Taxes

    Who Does The Current Tax Code Benefit?

    Are the non-workers benefiting from the current tax code in any way or is it the wealthy who are still getting the big breaks?
  10. Taxes

    How Getting A Raise Affects Your Taxes

    Many people think they may actually make less overall because they are paying more taxes.
RELATED FAQS
  1. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Trading Center