How progressive should income tax be

A progressive tax has more of a financial impact on higher-income individuals than on low-income earners. Low-income individuals pay a higher amount of taxes compared to high-income earners under a regressive tax system. That's because the government assesses tax as a percentage of the value of the asset that a taxpayer purchases or owns.

This type of tax has no correlation with an individual's earnings or income level. Regressive taxes include property taxes , sales taxes on goods, and excise taxes on consumables, such as gasoline or airfare. Excise taxes are fixed and they're included in the price of the product or service. Sin taxes , a subset of excise taxes, are imposed on commodities or activities that are perceived to be unhealthy or have a negative effect on society, such as cigarettes, gambling, and alcohol.

They're levied in an effort to deter individuals from purchasing these products. Sin tax critics argue that these disproportionately affect those who are less well off. Many also consider Social Security to be a regressive tax. An individual's earnings above this base are not subject to the 6. Employers pay an additional 6.

Higher-income employees effectively pay a lower proportion of their overall pay into the Social Security system than lower-income employees because it's a flat rate for everyone and because of this cap. Just as Social Security can be considered a regressive tax, it's also a proportional tax because everyone pays the same rate, at least up to the wage base. A proportional or flat tax system assesses the same tax rate on everyone regardless of income or wealth. This system is meant to create equality between marginal tax rates and average tax rates paid.

Other examples of proportional taxes include per capita taxes, gross receipts taxes, and occupational taxes. Proponents of proportional taxes believe they stimulate the economy by encouraging people to work more because there is no tax penalty for earning more.

They also believe that businesses are likely to spend and invest more under a flat tax system, putting more dollars into the economy. Taxes assessed under a progressive system are based on the taxable amount of an individual's income. They follow an accelerating schedule, so high-income earners pay more than low-income earners. Tax rate, along with tax liability , increases as an individual's wealth increases.

The overall outcome is that higher earners pay a higher percentage of taxes and more money in taxes than do lower-income earners. This sort of system is meant to affect higher-income people more than low- or middle-class earners to reflect the presumption that they can afford to pay more. The U. Its schedule of marginal tax rates imposes a higher income tax rate on people with higher incomes, and a lower income tax rate on people with lower incomes.

The percentage rate increases at intervals as taxable income increases. Each dollar the individual earns places him into a bracket or category, resulting in a higher tax rate once the dollar amount hits a new threshold. Part of what makes the U. The amount of the standard deduction changes from year to year to keep pace with inflation. Taxpayers can elect to itemize deductions instead if this option results in a greater overall deduction.

Many low-income Americans pay no federal income tax at all because of tax deductions. Estate taxes are another example of progressive taxes as they mainly affect high-net-worth individuals HNWIs and they increase with the size of the estate.

As with any government policy, progressive tax rates have critics. Some say progressive taxation is a form of inequality and amounts to a redistribution of wealth as higher earners pay more to a nation that supports more lower-income earners. Those who oppose progressive taxes often point to a flat tax rate as the most appropriate alternative. The percent of U. The following examples of regressive, proportional, and progressive taxes show how they work in practice:.

Under a proportional income-tax system, individual taxpayers pay a set percentage of annual income regardless of how much they earn. The fixed rate doesn't increase or decrease as income rises or falls. In the U. This puts the effective tax rate at just below My colleague Garrett Watson discussed the data this May. The original report found that the burden of federal taxes was much higher on high-earning households. They paid a much higher effective rate in total, similarly thanks to the progressivity of the personal income tax.

The fiscal response to COVID relied heavily on refundable tax credits, lowering the effective personal income tax rate for a majority of taxpayers to below or nearly zero. The Tax Policy Center recently estimated that In light of these estimates, distribution of the U. Of course, some people will argue that even if the tax code is currently progressive, it should be even more progressive.

But they should not dispute the fact that the wealthy pay a larger share of federal taxes than they earn of national income. The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you.

Would you consider contributing to our work? Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. A progressive tax is based on the taxpayer's ability to pay. It imposes a lower tax rate on low-income earners than on those with a higher income. This is usually achieved by creating tax brackets that group taxpayers by income ranges. The income tax system in the U. There were 16 tax brackets in 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. The degree to how progressive a tax structure is depends upon how much of the tax burden is transferred to higher incomes. 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 all of that money 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 the highest amounts of money. A progressive tax also requires those with the greatest amount of resources to fund a greater portion of the services that all citizens and businesses rely on, such as road maintenance and public safety.

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 rich, and even the middle class, unfairly. Opponents of the progressive tax generally are supporters of low taxes and correspondingly minimal government services.

The opposite of a progressive tax, a regressive tax , takes a larger chunk of disposable income from low-wage earners than from high-wage earners. A sales tax is an example of a regressive tax.

If two individuals, one rich and one poor, both buy an identical bag of groceries, both pay the same amount of sales tax. But the poorer person has shelled out a greater percentage of his or her income in order to get those groceries. A flat income tax system imposes the same percentage tax on everyone regardless of income.

In the U. However, this tax has a cap. That makes it a flat tax only on the people who earn less than that amount. That makes it a regressive tax. Internal Revenue Service.