What Is a Progressive Tax?
A progressive tax involves a tax rate that increases (or progresses) as taxable income increases. It imposes a lower tax rate on low-income earners and a higher tax rate on those with a higher income. This is usually achieved by creating tax brackets that group taxpayers by income ranges.
The income tax system in the U.S. is considered a progressive system, although it has been growing flatter in recent decades. For 2022 and 2023, there are seven tax brackets with rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. There were 16 tax brackets in 1985.
- A progressive tax imposes a higher tax rate on higher taxable incomes than lower ones.
- A regressive tax takes a larger percentage of income from low-income individuals than from those with high income.
- A sales tax is an example of a regressive tax.
- A flat tax is a single income tax rate that applies to all taxable income, no matter how much or how little.
- The U.S. Social Security payroll tax is considered a flat tax (with an income cap).
Understanding the Progressive Tax
The rationale for a progressive tax is that a flat percentage tax would be a disproportionate burden for people with low incomes. The dollar amount owed may be smaller, but the effect on their real spending power is greater.
The degree to how progressive a tax structure is depends upon how much of the tax burden is transferred to higher incomes. If one tax code has a low rate of 10% and a high rate of 30%, and another tax code has tax rates ranging from 10% to 80%, the latter is more progressive.
Advantages of a Progressive Tax
On the pro side, a progressive tax system reduces the tax burden on the people who can least afford to pay. That leaves more money in the pockets of low-wage earners, who are likely to spend more of it on essential goods and stimulate the economy in the process.
A progressive tax system also tends to collect more taxes than flat taxes or regressive taxes, as the highest percentage of taxes is collected from those with the highest amounts of money.
A progressive tax also results in those with the greatest amount of resources funding a greater portion of the services that all citizens and businesses rely on, such as road maintenance and public safety.
Disadvantages of a Progressive Tax
Critics of progressive taxes consider them to be a disincentive to success. They also oppose the system as a means of income redistribution, which they believe punishes the wealthy, upper class, and even the middle class, unfairly.
Opponents of the progressive tax generally are supporters of low taxes and correspondingly minimal government services.
Progressive Tax vs. Regressive Tax
The opposite of a progressive tax, a regressive tax takes a larger chunk of disposable income from low-wage earners than from high-wage earners.
A sales tax is an example of a regressive tax. If two individuals, one rich and one poor, both buy an identical bag of groceries, both pay the same amount of sales tax. But the poorer person has shelled out a greater percentage of their income in order to purchase those groceries.
Progressive Tax vs. Flat Tax
A flat income tax system imposes the same percentage tax rate on everyone, regardless of income. In the U.S., the payroll tax that funds Social Security and Medicare is often considered a flat tax because all wage earners pay the same percentage. However, for Social Security, this tax has a cap.
For 2022, the Social Security payroll tax was applied only to earnings up to $147,000. For 2023, that figure is $160,200. That makes it a flat tax on everyone, up to those levels.
The Medicare tax applies to all covered wages (there's no wage cap as there is for the Social Security tax).
Do I Pay the Same Percentage of Tax on All My Income?
No. With a progressive tax, you only pay your highest percentage on the portion of income that exceeds the minimum threshold. For example, if a single person makes $100,000 in 2022, they fall into the 24% bracket (as well as lower brackets). However, only the portion of their income that exceeds the bracket's minimum threshold of over $89,075 is taxed at that rate. Thus, income is taxed at 10% on the first $10,275, then 12% on income up to $41,775, and 22% on income up to $89,075. In this scenario, only $10,925 ($100,000 - $89,075) would be taxed at 24%.
How Often Do the Tax Brackets Change?
Tax brackets are set by Congress and enforced by the Internal Revenue Service (IRS). Changes typically come in the form of legislation like the Tax Cuts and Jobs Act of 2017, which kept seven brackets but lowered the rates that applied to almost every one.
What Is the Purpose of a Progressive Tax?
Progressive taxes exist so that the burden of paying for government services, oversight, and infrastructure doesn't fall disproportionately on those earning lower incomes. With a progressive tax system, those who earn less are taxed less. Those who earn more are taxed more. Since the top earners are taxed more and on larger sums of money, a progressive tax also increases the amount of tax revenue coming in.
The Bottom Line
A progressive tax is a tax that progresses to higher tax rates as taxable income increases. It means that those individuals with low incomes are taxed at lower rates than individuals with higher incomes.
The U.S. progressive income tax involves tax brackets, each with its own tax rate. For tax years 2022 and 2023, those tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. While the tax rates didn't change from 2022 to 2023, the range of income covered by each bracket increased to reflect inflation.