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.   

Related Topics

• What is Government Spending?
• Autonomous Spending
• Autonomous Consumption
• Fiscal Policy
• Expansionary Fiscal Policy
• Contractionary Fiscal Policy
• Progressive vs Regressive Tax
• Marginal Tax Rates
• Proportional Tax
• Trickle Down Theory
• Discretionary Fiscal Policy
• Automatic Stabilizers
• Effects of Discretionary Policy (Interest Rates & Lags)
• Crowding Out Effect 
• National Debt
• Government Borrowing
• Golden Rule
• Ricardian Equivalence
• Balanced Budget - Deficit and Surplus
• National Debt
• Standardized Employment Budget
• Deficit Hawk
• Austerity
• Twin Deficits
• Fiscal Policy and the Aggregate Supply and Demand Curve
• Stabilization Policy
• Robin Hood Effect
• Ricardo Barro Effect
• Automatic Stabilizers
• Standardized Employment Budget
• How Does Fiscal Policy Affect Interest Rates? 
• Crowding Out
• Types of Lag in Fiscal Policy
• Temporary and Permanent Fiscal Policy
• Limitations of Fiscal Policy?
• How Politics Affects Discretionary Fiscal Policy
• Government Borrowing
• National Savings and Investment Identity
• Debtor Nation
• Fiscal Policy Affects Trade Balances
• Twin Deficits
• Exchange Rates Affect Budget and Trade Deficits
• What are the risks of chronic large deficits in the United States?
• How Fiscal Policy Can Affect Trade Imbalances
• Government Borrowing Affect Private Savings
• Ricardian Equivalence
• Fiscal Policy Affects Investment and Economic Growth
• Crowding Out of Physical Capital Investment?
• How Does Government Borrowing Affect Interest Rates in Financial Markets?
• Government Investment in Physical Capital
• Public Investment in Human Capital
• Fiscal Policy Can Affect Technology Development

• Economic Cycle or Business Cycle
• Business Cycle Indicator
• Peak and Trough
• Recession and Depression
• Hard Landing vs Soft Landing
• Economic Bubble
• Boom and Bust Cycle
• Great Depression
• Baby Boomer Age Wave Theory

• Skyscrapper Effect (Economics)
• V-Shaped Recovery
• W-Shaped Recovery
• U-Shaped Recovery
• Kondratieff Wave Cycle
• Contagion
• Feedback Rule Policy
• American Customer Satisfaction Index
• CNN Effect
• Bureau of Economic Analysis
• Business Starts Index
• American Recover and Reinvestment Act
• Abenomics
• Emergency Economic Stabilization Act of 2008
• Commodity Credit Corporation
• Humphrey Hawkins Act

• Real Economic Growth Rate
• Fox-Trot Economy

• Stagnation
• Neoclassical Growth Theory
• Exogenous Growth Theory
• Endogenous Growth Theory
• New Growth Theory - Explained
• Classical Growth Theory - Explained
• Real Economic Growth Rate - Explained
• Plutonomy