A progressive tax system is designed so that individuals with greater income pay more taxes. The United States income tax system administered by the Internal Revenue Service is in theory a progressive tax system.
Individuals who earn small amounts of income pay no tax. When taxable income reaches a certain threshold, a tax is assessed at a certain percentage rate. When income reaches the next threshold, the percentage rate increases again.
For example:
- Taxable income - less than $10,000 – tax rate is 0%
- Taxable income - $10,000 to $30,000 – tax rate of 15%
- Taxable income – more than $30,000 – tax rate of 28%
The ranges above are alos known as tax brackets. Rates and brackets can vary by taxing authority. Other countries and individual states in the U.S. also may have different rates. The concept of the progressive tax only means that there is an increase in the rate as income increases.
Why Don’t the Rich Pay More Tax?
In practice, those with more money do not always pay more tax. The reason is that tax is assessed based taxable income. Taxable income is different than earned income. Earned income is added to investment income, (or netted against investment losses) to arrive at adjusted gross income (AGI).
AGI is then reduced by deductions and exemptions to arrive at taxable income. Individuals can take advantage of methods to reduce taxable, known as tax shelters or tax breaks.
These shelters are often used by taxpayers to legally reduce their tax burden. After the tax amount is computed, tax can be further lowered by the use of tax credits. Although deductions and credits are available to all, some are out of reach of all but high-income individuals.
Flat Tax Systems
A flat tax system in its purest form would assess the same tax rate on all income. Some cities tax income in this method. This eliminates the use of deductions, making sure higher income individuals pay more tax.
A modified flat tax system will tax only income above a certain threshold, making them really a progressive tax. This can be a politically expedient solution, in that it allows for low income individuals to pay no tax, while taxing everyone else at the same rate.
Regressive Taxes
A regressive income tax system would be one where tax rates decline as income increases. Although this is not used in the United States, there are some who believe that tax money generated from gaming and tobacco use are regressive taxes.
If the lottery and cigarettes are used disproportionately by lower income individuals, they will pay more tax, but per person and as a percent of income.
Progressive Income Tax
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