What is a Progressive Tax?
A progressive tax is one of two main types of tax systems utilized by a country. Under a progressive tax system, taxes are based on a taxpayer’s ability to pay.
Most nations, including the U.S., feature both regressive and progressive 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.
Read More: What is Regressive Tax?
Why Progressive Tax is Important
This subject is important because 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. Instead, the taxes paid by the wealthy generally impact their ability to invest in the financial markets or buy luxury items.
The federal government uses progressive tax as a way to lower income inequality. Progressive tax generally refers to income tax and tax credits and deductions. The taxes paid by individuals and families become progressively higher or lower depending on their income. Tax credits and deductions offset taxes even further.
How Does Progressive Tax Work?
Progressive taxation is achieved by taxing earned income at progressively higher rates as it increases. 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 system is.
The Tax Cuts and Jobs Act created seven marginal income tax brackets at the federal level, abd the tax rate increases as the amount of income earned increases. Therefore, lower-income taxpayers pay a lower tax rate than higher-income taxpayers.
Is the U.S. Tax System Progressive?
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 U.S. 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 2016 and paid 3% of income taxes that year. Conversely, the top 1% of taxpayers earned 19.7% of income and paid 37.3% of income taxes that year. In addition, the top 1% of taxpayers paid more money in income taxes in 2016 than the bottom 90% of taxpayers, who paid 30.5% of income taxes that year.
In addition, the average income tax rate of the bottom half of U.S. taxpayers in 2016 was 3.7%. Conversely, the average income tax rate of the top 1% of U.S. taxpayers in 2016 was 26.9%, or more than seven times higher than the average rate paid by the bottom half of taxpayers.
If the U.S. 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.
Advantages of a Progressive Tax System
Progressive tax systems are generally considered to be advantageous. They 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 taxes — to pay for more of the government services we all use.