Progressive Tax – Definition

Cite this article as:"Progressive Tax – Definition," in The Business Professor, updated April 4, 2019, last accessed October 21, 2020, https://thebusinessprofessor.com/lesson/progressive-tax-definition/.

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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.

A Little More on What is Progressive Tax

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.
  • It’s 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.

 

References for Progressive Tax

 

Academic Research on Progressive Tax

The uneasy case for progressive taxation, Blum, W. J., & Kalven Jr, H. (1951). U. chi. L. rev., 19, 417. This article takes a look at Progressive Taxation and a favourable case for it.

Understanding attitudes toward progressive taxation, Roberts, M. L., Hite, P. A., & Bradley, C. F. (1994). Public Opinion Quarterly, 58(2), 165-190. This paper surveys the attitude to Progressive Taxation and attempts to explain it’s understanding by the general public.

Progressive taxation and equal sacrifice, Young, H. P. (1990). The American Economic Review, 80(1), 253-266. This paper examines the threshold of equal sacrifice in the Progressive Taxation method.

Social welfare and the rate structure: A new look at progressive taxation, Bankman, J., & Griffith, T. (1987). Calif. L. Rev., 75, 1905. This paper examines Progressive Taxation from the fresh perspective of rate structures and social welfare.

Progressive taxation and long-run growth, Wenli, L., & Sarte, P. D. (2004). American Economic Review, 94(5), 1705-1716. This paper examines the sops offered during election times and their long term effects, especially regarding Progressive Taxation.

Progressive taxation and the social marginal cost of public funds, Dahlby, B. (1998). Journal of Public economics, 67(1), 105-122. This paper examines the effects of Social Marginal Cost Funds (SMCF) on Progressive Taxation.

Progressive taxation and tax morale, Doerrenberg, P., & Peichl, A. (2013). Public Choice, 155(3-4), 293-316. This paper studies the correlation between Progressive Taxes and the morale of tax paying citizens. It proposes the hypotheses that the relationship is positive and declines with increase in income and tests them with empirical analyses of data.

Progressive taxation and income inequality in dynamic competitive equilibrium, Sarte, P. D. G. (1997). Journal of Public Economics, 66(1), 145-171. This paper examines the impact of Progressive Taxation in a dynamic system with heterogeneous factors like income inequality.

Progressive taxation in a dynastic model of human capital, Erosa, A., & Koreshkova, T. (2007). Journal of Monetary Economics, 54(3), 667-685. This paper proposes an alternative proportional tax system in the U.S. in lieu of the current Progressive Taxation with the help of quantitative economic inequality theory.

Progressive taxation, redistribution, and labor supply, Sandmo, A. (1983). The Scandinavian Journal of Economics, 311-323. This paper studies the effect of Progressive Taxation on reduced labour supply post redistribution.

Recent and contemporary theories of progressive taxation, Fagan, E. D. (1938). Journal of Political Economy, 46(4), 457-498. This paper takes a look at the recent theories on Progressive Taxation.

Progressive taxation and wage setting: Some evidence for Denmark, Lockwood, B., Sløk, T., & Tranæs, T. (2000). Scandinavian Journal of Economics, 102(4), 707-723. This paper examines the effect of Progressive Taxation on wage regulation with data from the Danish earnings markets.

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