Progressive Tax - Explained
What is a Progressive Tax?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Table of ContentsWhat is a Progressive Tax?How Does a Progressive Tax Work?Advantages of Progressive Taxes Disadvantages of Progressive TaxProgressive Vs. Regressive TaxesProgressive Vs. Flat TaxesAcademic Research on Progressive Tax
What is a Progressive Tax?
Progressive Tax is the practice of charging different income levels in accordance with the taxpayer's ability to pay. Under Progressive Tax, lower income groups are charged a lower rate of tax while higher income groups pay taxes at a higher rate. The highest income earners pay taxes at the highest rates.
How Does a Progressive Tax Work?
The reasoning behind charging different percentages of taxes is to allow low income earners to afford the basic necessities before contributing to the official coffers. High income earners on the other hand can afford the basics with ease and hence are able to pay higher taxes to the government. The United States government follows the Progressive Tax system.The degree of a Progressive Tax system is based on the tax rates spread. A system that ranges in tax rates from 10% to 50% is more progressive than a system with a range of 20% to 40%.
Advantages of Progressive Taxes
- Progressive tax does not burden low income earners, allows them more flexibility to spend, creating a route for their income to be channeled back into the economy.
- Scope for collecting taxes is higher as the rate of taxes rises with increase in income.
- Its a tax system that lets the highest income earners pay more taxes towards public services like roads, snow removal, and more.
The Progressive Tax system in use in the United States came into effect on January 2018. It has 7 tax brackets. The lowest brackets have tax rates of 10% and 12%. Medium income ranges are taxed at 22% or 24%. The highest tax rates are charged at 32%, 35%, and 37%. These can be filed under different relationship statuses like single, married, or heads of households.
Disadvantages of Progressive Tax
Progressive Tax draws criticism for its entrenched discrimination against wealthy people and wealth creation. Critics also believe that the underlying rationale of rich people paying more towards welfare works is a myth not borne out by data as spending on welfare works only makes up a miniscule of government funding.
Progressive Vs. Regressive Taxes
Regressive tax is the converse of Progressive tax in that it charges relatively higher tax rates to the people in the lowest income brackets than the tax rates for people in the higher income brackets. For example, a sales tax fixed at 12% pinches the lower wage earner more than it does a high wage earner.
Progressive Vs. Flat Taxes
A flat tax system imposes a uniform tax rate across all income spectrums. Whether you are the lowest wage earner or a multi-millionaire, tax rates stay steady and low. The tax rate of 15% for all expatriates in Singapore is a good example of a Flat Tax system.Payroll taxes in the United States are considered to be flat for people earning less than $118, 500. For e.g, someone who makes $40000 a year will pay the same taxes as another person making $80000 per annum. After the threshold of $118,500 is crossed however, the system veers to a Regressive tax rate with a slight reduction in tax percentage.