INTRODUCTION
A progressive tax involves a tax rate that increases (or progresses) as taxable income increases. Lower tax rates are imposed on low income earners and higher tax rates on high income earners. This is usually achieved by creating tax brackets that group taxpayers according to income thresholds.
The income tax system in the U.S. is considered a progressive system, although it has been growing flatter in recent decades. For 2023 and 2024, there are seven tax brackets with rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. There were 16 tax brackets in 1985.
A progressive tax is a tax in which the tax rate increases as the taxable amount increases. The term progressive refers to the way the tax rate progresses from low to high, with the result that a taxpayer’s average tax rate is less than the person’s marginal tax rate.
The term can be applied to individual taxes or to a tax system as a whole. Progressive taxes are imposed in an attempt to reduce the tax incidence of people with a lower ability to pay, as such taxes shift the incidence increasingly to those with a higher ability-to-pay. The opposite of a progressive tax is a regressive tax, such as a sales tax, where the poor pay a larger proportion [how?] of their income compared to the rich.
Understanding Progressive Tax
Progressive taxation is often suggested as a way to mitigate the societal ills associated with higher income inequality, as the tax structure reduces inequality; economists disagree on the tax policy’s economic and long-term effects. One study suggests progressive taxation is positively associated with subjective well-being -being, while overall tax rates and government spending are not.
The rationale for a progressive tax is that a flat percentage tax would be a disproportionate burden for people with low incomes. The dollar amount owed may be smaller, but the effect on their real spending power is greater.
Advantages of a Progressive Tax
On the pro side, a progressive tax system reduces the tax burden on the people who can least afford to pay. That leaves more money in the pockets of low-wage earners, who are likely to spend more of it on essential goods and stimulate the economy in the process.
A progressive tax system also tends to collect more taxes than flat taxes or regressive taxes, as the highest percentage of taxes is collected from those with the highest amounts of money.
A progressive tax also results in those with the greatest amount of resources funding a greater portion of the services that all citizens and businesses rely on, such as road maintenance and public safety.
Disadvantages of a Progressive Tax
Critics of progressive taxes consider them to be a disincentive to success. They also oppose the system as a means of income redistribution, which they believe punishes the wealthy, upper class, and even the middle class, unfairly.
Opponents of the progressive tax generally are supporters of low taxes and correspondingly minimal government services.
Progressive vs Regressive Tax System
The opposite of the progressive system is the regressive tax rate where tax liability reduces as the taxable amount increases. Regardless of the rate used, the government aims to collect money from citizens. After pooling all the money together, it can provide public goods and services such as infrastructure and healthcare.
Impact of Inflation on a Progressive Tax System
Inflation is a state where the price levels of goods and services keep on increasing without a corresponding positive change in standards of living. It reduces the purchasing power of money and also the value of investments. Thus, during inflation, those affected by progressive tax rates pay higher than the proper value initially set for them.
CONCLUSION
Various tax methods that governments may use include progressive, regressive, digressive, or proportional. The Progressive Tax System is one where the tax burden increases as taxable income increases. In some instances, there is a minimum tax-free amount where individuals earning less than the stated minimum taxable amount are not liable for any payments to tax authorities.
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