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 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 the payroll tax, making the tax regressive.