A progressive tax is one in which the tax rate rises (or advances) in step with the level of taxable income. The tax rate is lower for those with low incomes and higher for those with higher incomes. Usually, this is done by setting up tax brackets that divide up taxpayers according to various income levels.
The U.S. income tax system is still seen as progressive, notwithstanding recent flattening. There are seven tax brackets for 2022 and 2023, with rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. In 1985, there were 16 tax rates.
Understanding Progressive Tax
A flat percentage tax would unfairly burden those with low incomes, which is the justification for a progressive tax. Despite the fact that there may be less money outstanding, the impact on their actual purchasing power is larger.
Depending on how much of the tax burden is passed to higher earners, a tax structure's progressiveness is determined. If two tax codes have tax rates that range from 10% to 80% whereas one tax law has a low rate of 10% and a high rate of 30%, the latter is more progressive.
Advantages of a Progressive Tax
A progressive tax system benefits individuals with lower incomes by reducing their tax burden. The economy will grow as a result of putting more money in the hands of low-wage people who are more likely to spend it on needs.
Progressive tax systems often generate more revenue than flat or regressive tax systems since the majority of taxes are paid by those with the highest earnings.
A progressive tax also makes the richest people pay a bigger portion of the costs for basic services like public safety and road maintenance that are needed by all individuals and businesses.
What Is the Purpose of a Progressive Tax?
Progressive taxes are in place to stop people with lower incomes from paying an unreasonably disproportionately high amount of the cost to sustain public services, infrastructure, and oversight. A progressive tax system lowers the amount of taxes paid by those with lower incomes. Higher income earners pay higher taxes. Because the top earners pay higher taxes and are taxed on higher incomes, a progressive tax also increases the amount of tax revenue received.
Disadvantages of a Progressive Tax
Progressive taxes are criticized because they are thought to discourage success. Additionally, they disagree with the system's use as a tool for economic redistribution because they think it unfairly punishes the wealthy, upper class, and even the middle class.
Progressive tax opponents typically prefer low taxes and concomitantly less government services.
- With progressive tax, greater taxable incomes are subject to a higher tax rate than smaller ones.
- Regressive tax takes more money from people with low incomes than from people with high incomes.
- An illustration of a regressive tax is sales tax.
- The term "flat tax" refers to a single income tax rate that is applied to all taxable income, regardless of its size.
- The Social Security payroll tax in the US is regarded as a flat tax (with an income cap).