Progressive Tax Definition

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What is a progressive tax?

A graduated tax is a tax that imposes a lower tax rate on low-income earners compared to those with higher income, which makes it based on the taxpayer’s ability to pay. This means that it takes a higher percentage for high income people than for low income people.

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Progressive tax

Break down the progressive tax

A graduated tax is a tax that imposes a higher tax rate on people who earn higher income. The reason is that people with low incomes generally spend a higher percentage of their income to maintain their standard of living. Those who are wealthier can usually afford the basic necessities in life (and then some).

In the United States, the income tax system is seen as a progressive system.

The degree of progressiveness of a tax structure depends on the speed with which tax rates increase in relation to the increase in income. For example, if a tax code has a low rate of 10% and a high rate of 30%, and another tax code has tax rates ranging from 10 to 80%, the latter is more progressive.

The advantages of a progressive tax

Progressive tax systems reduce the (tax) burdens on those who can least afford to pay them, and these systems leave more money in the pockets of the low paid, who are likely to spend all their money and boost the economy. Progressive tax systems also have the ability to collect more taxes than fixed or regressive taxes, because tax rates are indexed to increase as income increases. Progressive taxes allow those with the greatest resources to finance more of the services on which individuals and businesses depend, such as roads, first responders and snow removal.

The current tax system in the United States, which was enacted in December 2020 and came into effect in January 2020, has seven different tax rates or tax brackets based on income and filing status (single, spouse married or head of household)). These tax rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%.

Disadvantages of progressive taxes

Critics of progressive taxes view them as discriminatory against the wealthy or high-income earners. These critics believe that the progressive American income tax is indeed a means of income redistribution, based on the myth that most taxes are used to finance social protection programs. However, only a small part of public spending is devoted to social benefits.

Progressive tax vs regressive tax

The opposite of a progressive tax, a regressive tax, levies a higher percentage of income on low wages than on high wages. A sales tax is an example of a regressive tax, because if two people buy the same amount of goods or services, the sales tax constitutes a higher percentage of the low-income person’s wages and a lower percentage of the higher income person.

Progressive tax versus 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 tax imposes the same percentage of tax on everyone, regardless of income. For example, if everyone is taxed at 10%, regardless of income, it is a flat tax.

Payroll tax in the United States is often considered a flat tax because it taxes all employees at the same percentage. However, as of 2020, this tax is not applied to earnings over $ 118,500 and, therefore, is only a flat tax for those earning less than this amount. Taxpayers earning more than this amount pay a lower percentage of their total income in payroll tax, making the tax regressive.

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