A progressive tax involves a tax rate that increases (or progresses) as taxable income increases. This system imposes a lower tax rate on low-income earners and a higher tax rate on those with higher incomes. It usually achieves this by creating tax brackets that group taxpayers by income range.
The income tax system in the U.S. is considered progressive, with several tax brackets designed to ensure that higher-income individuals pay a higher percentage of their income in taxes. 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 but have since been simplified.
Key Takeaways
- A progressive tax system imposes a higher tax rate on higher taxable incomes than on lower ones.
- In contrast, a regressive tax takes a larger percentage of income from low-income individuals than from those with high income.
- Sales tax is an example of a regressive tax.
- A flat tax is a single income tax rate that applies to all taxable income, regardless of the amount earned.
- The U.S. Social Security payroll tax is considered a flat tax but features an income cap.
Understanding the Progressive Tax
The rationale for a progressive tax is that a flat percentage tax can disproportionately burden people with low incomes. While the dollar amount owed may be smaller, the effect on their real spending power is greater.
The degree of progressiveness in a tax structure depends on how much of the tax burden is transferred to higher income levels. For instance, a tax system with rates ranging from 10% to 30% can be less progressive than a system where rates range from 10% to 80%.
Advantages of a Progressive Tax
A progressive tax system provides several benefits:
- Economic Stimulation: By reducing the tax burden on lower-income individuals, more money remains in their pockets which they are likely to spend on essential goods, thus stimulating the economy.
- Higher Revenue: These systems tend to collect more taxes than flat or regressive taxes since higher-income individuals can contribute a more significant amount.
- Funding Public Services: Individuals with greater resources fund a larger portion of community services such as road maintenance and public safety.
Disadvantages of a Progressive Tax
Critics argue that progressive taxes can act as a disincentive to success. They also oppose the system as a form of income redistribution, believing it unfairly penalizes the wealthy and upper middle class.
Generally, opponents of progressive tax prefer lower taxes and correspondingly minimal government services.
Progressive Tax vs. Regressive Tax
A regressive tax reverses the logic of progressive taxation, taking a larger chunk of disposable income from low-wage earners. Sales tax serves as an example: both a rich and a poor individual pay the same amount of tax on an identical bag of groceries, meaning the tax represents a higher percentage of total income for the poorer person.
Progressive Tax vs. Flat Tax
A flat income tax system imposes the same percentage tax rate on everyone, regardless of income. In the U.S., the Social Security payroll tax is often categorized as a flat tax since all wage earners pay the same percentage. However, Social Security’s tax has a wage cap, making it somewhat unique.
For 2023, the Social Security payroll tax applies only to earnings up to $160,200. This figure will rise to $168,600 in 2024. On the other hand, the Medicare tax applies to all covered wages without a cap.
Do I Pay the Same Percentage of Tax on All My Income?
No, with a progressive tax, you only pay your highest percentage on the portion of income exceeding the minimum threshold. For instance, if a single person earns $100,000 in 2023, they fall into the 24% bracket but only the income over $95,375 is taxed at that rate. Different amounts are taxed at lower rates for the amounts below each bracket threshold.
How Often Do the Tax Brackets Change?
Tax brackets are set by Congress and implemented by the Internal Revenue Service (IRS). Legislative changes, like the Tax Cuts and Jobs Act of 2017, can adjust these brackets and rates.
What Is the Purpose of a Progressive Tax?
Progressive taxes aim to prevent the financial burden of government services, oversight, and infrastructure from falling too heavily on low-income earners. With higher earners taxed more and on larger sums of money, this system amplifies tax revenue while supporting economic equality.
The Bottom Line
A progressive tax is a system that applies higher tax rates to higher income levels while imposing lower rates on low-income individuals. The U.S. tax system structures this through multiple tax brackets. For tax years 2023 and 2024, these brackets range from 10% to 37%, and the income ranges covered by each bracket may adjust over time to reflect inflation and other economic factors.
Related Terms: regressive tax, flat tax, Social Security tax, Medicare tax, Tax Cuts and Jobs Act.
References
- Tax Foundation. “Glossary: Progressive Tax”.
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2024”.
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2023”.
- Tax Foundation. “Historical U.S. Federal Individual Income Tax Rates & Brackets, 1862-2021”.
- Tax Foundation. “Glossary: Regressive Tax”.
- Social Security Administration. “Contribution and Benefit Base”.
- Internal Revenue Service. “Topic No. 751, Social Security and Medicare Withholding Rates”.
- Tax Policy Center. “How Did the Tax Cuts and Jobs Act Change Personal Taxes?”
