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Progressive tax: Definition & examples

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What is a progressive tax?

A progressive tax is one of two main types of tax systems used by a country. Under a progressive tax system, taxes are based on a taxpayer’s ability to pay.

As a result, the average tax burden increases along with a taxpayer’s income. High-income taxpayers end up paying a disproportionately higher share of taxes while low- and middle-income taxpayers pay a lower share of taxes.

Most nations, including the U.S., feature both progressive and regressive tax systems. For example, our income tax system is progressive because it imposes a lower tax rate on low-income earners than on those with a higher income. Tax brackets group taxpayers by income ranges, and high-income taxpayers pay a larger share of the overall tax burden than low-income taxpayers.

However, there are also a number of regressive taxes that are assessed at the federal, state and local levels. For example, sales taxes are an example of regressive tax because the same amount of tax is paid by everyone, regardless of their income. Additionally, flat tax is also a regressive tax, commonly known in regards to taxes for Social Security and Medicare.

How does progressive tax work?

Progressive taxation is achieved by taxing earned income at progressively higher rates as it increases — thus the name, progressive tax. The federal marginal income tax brackets tax each dollar of income at a certain rate that rises as the taxpayer’s income rises. The faster tax rates rise in relation to increases in income, the more progressive a tax rate system is.

There are seven marginal income tax brackets at the federal level, and the tax rate increases as the amount of income earned increases. Therefore, lower-income taxpayers pay a lower tax rate than higher-income taxpayers.

Progressive tax examples

For an example of how progressive tax works, let’s consider John and Mark.

Both are single but John earns $80,000 per year while Mark earns $600,000 per year.

John’s income would place him in the 22% federal income tax bracket in tax year 2022, so his federal tax bill would be $13,349. Meanwhile, Mark’s income would place him in the 37% federal income tax bracket, so his federal tax bill would be $186,072. (This simple example doesn’t factor in deductions and other adjustments to taxable income.)

Mark would pay much more in federal income tax than John due to his higher income and, thus, ability to pay.

Now let’s look at two married couples who file jointly.

Andrew and Elizabeth earn a combined $170,000 per year, while Anthony and Tyler earn a combined $800,000 per year. Andrew and Elizabeth’s income places them in the 22% federal income tax bracket, so their federal tax bill would be $28,897. Meanwhile, Anthony and Tyler’s income places them in the 37% federal income tax bracket, so their federal tax bill would be $232,522 (again, not considering deductions and other income adjustments).

Anthony and Tyler would pay much more in federal income tax than Andrew and Elizabeth due to their higher income and, thus, ability to pay.

Advantages and disadvantages of progressive tax

Proponents of progressive tax systems consider them to be advantageous because progressive taxes lower the tax burden on citizens who can least afford to pay taxes. At the same time, they permit citizens who possess the most resources — and hence, can better afford to pay a higher tax amount — to pay for more of the government services we all use.

Low-income taxpayers spend a larger proportion of their income on basic living expenses like food, clothing, shelter and transportation. The taxes they pay have a greater impact on their standard of living than they do on high-income taxpayers, most of whom can easily afford to pay for the basics.

However, critics of progressive tax systems believe they act as a disincentive to hard work and success. Some of them also consider progressive taxes to be a form of income redistribution that punishes the rich and middle class. These critics usually support lower taxes and minimal government services.

High-income taxpayers pay the highest average income tax rate.

Average federal income tax rate by income group (2016)

Source: IRS, Statistics of Income, Individual income tax rates and tax shares (2018). Graph from the Tax Foundation.

How progressive is the U.S. tax system?

In a progressive tax system, the wealthy will pay a larger overall share of taxes than those who earn less. So how progressive is the United States’ tax system?

According to the Tax Foundation, the bottom half of taxpayers earned 11.6% of all the income that was earned in the U.S. in 2018 and paid 2.9% of income taxes that year. Conversely, the top 1% of taxpayers earned 20.9% of income and paid 40.1% of income taxes that year.1

In 2018, the top 50% of all taxpayers paid 97.1% of all individual income taxes, while the bottom 50% paid the remaining 2.9%. Since 2001, the share of federal income taxes paid by the top 1% of U.S. taxpayers has increased from 33.2% to 40.1% in 2018.2

If the U.S. income tax system were not progressive, different income groups would pay a more similar share of total taxes. However, this isn’t the case, which means that the U.S. system is a progressive tax system.

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