Understanding Progressive Tax

A progressive tax is a system of taxation where the tax rate increases as the income of the taxpayer increases. This system is designed to create a fairer tax system, where those who earn higher incomes pay more taxes than those who earn lower incomes. In this article, we will be discussing what a progressive tax is and how it works.

What is a Progressive Tax?

A progressive tax system is one of three major tax systems, along with regressive and proportional tax systems. The progressive tax system is used by many developed countries, including the United States. In a progressive tax system, the tax rate increases as the income of the taxpayer increases. This means that those who earn higher incomes pay a larger percentage of their income in taxes than those who earn lower incomes.

How does it Work?

The progressive tax system works by dividing income into brackets and taxing each bracket at a different rate. The initial or lowest bracket is usually taxed at a lower rate, while the highest bracket is taxed at a higher rate. For example, in the United States, the current income tax system has seven tax brackets, with rates ranging from 10% to 37%.

The concept behind the progressive tax system is that those who earn higher incomes can afford to pay a larger percentage of their income in taxes, while those who earn lower incomes cannot. This creates a more equitable system, where those who can afford to pay more, do so.

Advantages of Progressive Taxation

The progressive tax system is widely used because of its advantages. The first advantage is that it creates a more equitable tax system. Those who earn higher incomes have a greater ability to pay and should, therefore, pay a larger percentage of their income in taxes.

Another advantage of progressive taxation is that it can generate more revenues for the government. Since those who earn higher incomes pay a larger percentage of their income in taxes, the government can collect more revenue.

Disadvantages of Progressive Taxation

While the progressive tax system has several advantages, it also has some disadvantages. One disadvantage is that those who earn higher incomes may feel that they are being unfairly targeted and may attempt to avoid paying taxes by seeking ways to reduce their taxable income.

Another disadvantage is that the progressive tax system can create a disincentive for those who earn higher incomes to work or invest more. This is because they may feel that they are not being rewarded for their efforts since they are paying more in taxes.

Conclusion

Overall, the progressive tax system is widely used because of its ability to create a more equitable tax system and generate more revenues for the government. While it has some disadvantages, these can be mitigated through good tax planning and careful management of the tax system. By understanding how the progressive tax system works, taxpayers can better plan their finances and ensure that they are paying the appropriate amount of tax.

The income tax is a direct tax in which a portion of an individual’s earned or unearned wealth is extracted for the purpose of taxation. States that choose to impose the income tax often choose to adopt a progressive tax system. An individual’s income is broken into usually three different tax brackets to simplify the categorization of earners. The three tax brackets reflect the socioeconomic class divisions of the working class, middle class, and the rich. As a person’s income increases, so does the percentage of money goes to paying that income based on the three income tax brackets.

Income tax systems are only considered progressive when members of the upper end of the socioeconomic spectrum pay the highest percentage of their earnings to income tax. Progressive taxes, theoretically, place the heaviest tax burden on the richer members of society. This is a state legislature’s means of making the income tax more equitable. The theory behind the the progressive tax states that this distribution of the tax burden keeps revenues at a reasonable level even during an economic recession. If an economy slumps, the change in tax burden on each socio-economic class is lessened. The poor and the middle classes do not experience as much of a change in their real wages as do the rich who experience the least change in real wages. The progressive tax is a means of averting social upheaval when the economy slumps.

Since 1913, when America ratified the Sixteenth Amendment to the federal constitution, some states have chosen to impose their own income taxes as well. The income tax was historically progressive throughout most of its history. Income tax progressiveness peaked during the 1950s and remained relatively stable in this manner until 1980. 1980 marked the beginning of federal income tax reform that broke America’s historical trend of a progressive income tax. State governments quickly followed the same trend as the federal governments while others choose to keep the progressive income tax system. The belief behind the renunciation of the progressive tax was that the rich would be free to expand their financial enterprise with more capital under their belt as a result of lesser taxes. The re-concentration of wealth among the richest
members of society was believed to be an engine of job creation assuming that the rich’s wealth would trickle down to the lower members of society.

Critics of progressive taxes believe that job creation is stymied by rich employer’s inability to hire new employees as a result of higher taxes. Proponents of progressive taxes believe that such a premise is of no
consequence due to the counter-intuitive system of tax deductions and credits. Tax deductions and credits are another attempt to render the income tax more equitable and many of these reductions are designed to ease the tax burden of the poor and middle classes. However, it is well known that the rich can afford to hire the best tax preparers to optimize their tax deductions, effectively rendering the progressive tax inconsequential. The progressive tax is the state and local government’s means of controlling market behavior and an engine of
social stability. Essentially, the fairness of each social classes’ tax burden is primarily based on the self-perception of the populace and the perception that the lower and middle classes have on the rich. Generally, the working class are hopeful enough to believe that someday, they will attain fabulous wealth. The middle class are relatively content with the wealth they have; and the rich do their best to preserve whatever wealth they have attained.