Progressive Tax

What Is a Progressive Tax?

A progressive tax is based on the taxpayer's ability to pay. It imposes a lower tax rate on low-income earners than 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 2021, there are only seven tax brackets, with rates of 10%, 12%, 22%, 24%, 32%, 35% and 37%. There were 16 tax brackets in 1985.

Key Takeaways

  • A progressive tax imposes a higher percentage rate on taxpayers who have higher incomes. The U.S. income tax system is an example.
  • A regressive tax imposes the same rate on all taxpayers, regardless of ability to pay. A sales tax is an example.
  • A flat tax is an income tax that is the same percentage of income for all. The U.S. Social Security payroll tax would be a flat tax except that it has an upper cap.

Progressive Tax

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 all of that money 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 the highest amounts of money.

A progressive tax also requires those with the greatest amount of resources to fund 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 rich, 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 his or her income in order to get those groceries.

Progressive Tax vs. Flat Tax

A flat income tax system imposes the same percentage tax 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, this tax has a cap. For 2021, the payroll tax is not applied to earnings over $142,800. (For 2022, the tax is not applied to earnings over $147,000). That makes it a flat tax only on the people who earn less than that amount. Taxpayers earning more than $142,800 a year pay a lower percentage of their overall income in payroll taxes. That makes it a regressive tax.

Article Sources
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  1. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2021." Accessed Oct. 25, 2021.

  2. Tax Foundation. ”U.S. Federal Individual Income Tax Rates History, 1862-2013 (Nominal and Inflation-Adjusted Brackets).” Accessed Oct. 25, 2021.

  3. Tax Foundation. "Regressive Tax." Accessed Oct. 25, 2021.

  4. Internal Revenue Service. "Topic No. 751 Social Security and Medicare Withholding Rates." Accessed Oct. 25, 2021.

  5. Social Security Administration. "2022 Social Security Changes: Cost-of-Living Adjustment (COLA)," Page 1. Accessed Oct. 25, 2021.

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