Progressive Tax Definition System Rates Vs Regressive Tax

Progressive Tax Definition

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For the progressive tax system to work, taxpayersTaxpayersA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws.read more are segregated based on their income ranges. As per their income group, the applicable tax rates are imposed with the rich paying more taxes and the poor paying less. The applicable tax rates for a particular income group increase with their earnings.

Key Takeaways

Progressive tax refers to the tax arrangement wherein the government imposes taxes with respect to the income levels of individuals. As a result, the higher-income group pays more tax than the lower-income group.There are seven tax brackets appliable in the United States, which include 10%, 12%, 22%, 24%, 32%, 35%, and 37%.It is different from a regressive tax structure, where the taxes levied on individuals are the same irrespective of their income ranges.The progressive form of taxation increases with the increase in income level. Hence, it helps an economy bridge the rich and poor gap arising from income inequality.

Progressive Taxes Explained

A progressive tax arrangement attempts to eradicate the income inequalityIncome InequalityIncome inequality refers to the crucial imbalance of income dispersal across the population.read more issues across an economy. Though the taxable amount is disproportionately distributed among the population with respect to their earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.read more, it helps lower-income groups to have a sufficient amount left in hand after paying their share of tax. As a result, people get an opportunity to serve their lifestyle needs without much struggle.

Such taxes are imposed based on the tax brackets segregating taxpayers into different income groups. The tax slabs divide the tax liability from 0% to 45% among the citizens. As of 2021, there are seven tax brackets in the United States – 10%, 12%, 22%, 24%, 32%, 35%, and 37%. With the increase in the level of income of individuals, their tax liability increases, and hence, the arrangement is termed progressive tax.

Some of the types of progressive taxes are as follows:

Investment income tax – This progressive income tax is imposed on income generated from people’s savings and investments.Estate tax – It is the form of tax imposed on the assets passed on to heirs. The taxes apply only if the cost of assets is above a specific amount set by the higher authorities.Tax Credits – The progressive tax attempts to reward certain individuals for their tax contributions. These credits are some amounts deducted from the taxable amount of an individual and not the gross incomeGross IncomeThe difference between revenue and cost of goods sold is gross income, which is a profit margin made by a corporation from its operating activities. It is the amount of money an entity makes before paying non-operating expenses like interest, rent, and electricity.read more earned. These include elderly and disabled tax credit, retirement savings contribution credit, etc.

Examples

Let us consider the following progressive tax examples to understand the concept better:

Example #1

Harriet, an IT professional, had an income worth $10,000, while a shopkeeper in the same nation earned $5,000. As per the government rules, the former fell under the tax bracket of 20%, while the latter was liable to pay 10% of the income.

As a result, Harriet paid $2000 as tax while the shopkeeper had to pay only $500.

Example #2

Let us check out the single filer tax bracket for 2022:

Advantages

The progressive tax system is so designed that it benefits both the citizens of an economy and the government.

This arrangement removes the economic barrier caused due to the wide gap between the income ranges. Moreover, with a different progressive tax rate, the amount payable as tax is distributed among the citizens, indicating the economy’s elasticity. As a result, the highly paid individuals carry the heaviest tax loads and vice-versa.

The tax system lets eradicate the issues arising from income inequality, thereby making it easier for each individual in an economy to bear the cost of living. It also helps raise employment opportunities since the marginal propensity to consumeMarginal Propensity To ConsumeMarginal Propensity to Consume refers to the increase in consumption owing to the increment in disposable income. It is determined as the ratio of change in consumption (ΔC) to change in disposable income (ΔI). read more increases as wealthWealthWealth refers to the overall value of assets, including tangible, intangible, and financial, accumulated by an individual, business, organization, or nation.read more gets distributed from the rich to the poor.

Above everything else, when individuals find the tax rates lenient, they do not skip paying taxes. Thus, in such a progressive arrangement, the government generates more revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more in the form of timely and regular tax payments.

Disadvantages

Even though such taxes bridge the gap between the rich and the poor classes of people in an economy, critics believe that the progressive tax structure stands unfair to the higher income group, including the middle-class families. As a result, many high-income groups opt for keeping their actual earnings a secret, thereby evading taxes.

Different nations imply different tax rates as economic income distribution varies from one to another. As the taxes received from the richer class are redistributed from the poor class through various government programs, some may perceive this as socialism.

Progressive vs Regressive Tax

While progressive tax is imposed based on the income range one belongs to, the regressive taxRegressive TaxA regressive tax is the system of taxation where all citizens in the country are taxed at the same rate without considering their income levels. As a result, a more significant percentage of the income of the low-income group is charged as tax compared to the high-income group.read more is levied irrespective of the effect of any factor on one’s taxable incomeTaxable IncomeThe taxable income formula calculates the total income taxable under the income tax. It differs based on whether you are calculating the taxable income for an individual or a business corporation.read more.

In the progressive arrangement, higher-income groups are subject to paying higher taxes, and lower-income groups pay lower taxes, given the government’s tax rates. On the contrary, the regressive tax structure levies the same tax on individuals no matter how much they earn. Whether individuals belong to higher income groups or lower-income groups, the tax to be paid is the same for all.

While income taxes fall under the progressive arrangement, sales taxesSales TaxesThe government levies sales tax on the consumption of various goods and services as the percentage added to the product and services from which the government earns revenue and does the company’s welfare. In the United States, 38 different states have different taxes, from Alaska (1.76%) to Tennessee (9.45%).read more are regressive. The former is imposed as per the tax brackets in which individuals fall, while the latter remains the same for all when buying the same products with the same sales tax.