A progressive tax is one that levies a higher rate on those who can afford to pay it, as opposed to those who cannot. The taxpayer's wealth or income plays a role in determining the amount.
Progressive Tax - what it means, along with some examples
Those who have higher incomes are subject to a greater proportion of their earnings to taxation under a progressive tax system than those with lower incomes. The payment of basic expenses, such as housing, food, and transportation, can be difficult for families with lower incomes. They can devote a greater proportion of their incomes to cover their living costs thanks to the progressive tax system. Progress progressive tax systems make it easier for people living in poverty to buy the things they need, boosting overall economic demand. Flat and regressive taxes, as opposed to progressive taxes, can make it more difficult for taxpayers with lower incomes to afford a reasonable standard of living. Even after paying the tax, wealthy people can still afford food, shelter, and other necessities. Still, a progressive tax may hinder their ability to invest in the stock market and buy luxury goods. If we had a progressive tax system, the person who made less money would be subject to a lower tax rate than the person who made more money. Consider the following scenario: two people, one with an annual income of $12,000 and the other with an annual income of $120,000. Under a tax system that is progressive, they would be subject to different tax rates. The person with the lower income might be required to pay ten percent, or $1,200, in taxes, which would leave them with ten thousand eight hundred dollars to meet all of their requirements. A higher percentage of taxes would be withheld from the person who has a higher income. Let's say that they paid a tax rate of 24 percent on their income of $120,000, which would bring the total to $28,800. They would still have $91,200 available after paying all of their bills.How does a tax that goes up in stages operate?
With a progressive tax, different tax rates apply to different income levels, with the highest income levels being subject to the highest tax rates. The federal income tax that is levied in the United States is a progressive tax. People who make more money pay a higher percentage of their income in taxes, while those who make less pay a lower percentage of their income (up to 37 percent ). There are a number of different tax brackets, or groupings, of taxable income, and each of these is subject to a different rate of taxation. These are the income tax rates and brackets that will be in effect for single taxpayers, married couples filing jointly, and individuals who are considered to be heads of households in the year 2021. The income levels reflect taxable income, the amount of income that remains after considering all exemptions and deductions.
Rate |
Single, Taxable Income Over |
Married/Joint, Taxable Income Over |
Head of Household, Taxable Income Over |
| 10% | $0 | $0 | $0 |
| 12% | $9,950 | $19,900 | $14,200 |
| 22% | $40,525 | $81,050 | $54,200 |
| 24% | $86,375 | $172,750 | $86,350 |
| 32% | $164,925 | $329,850 | $164,900 |
| 35% | $209,425 | $418,850 | $209,400 |
| 37% | $523,600 | $628,300 | $523,600 |
Different kinds of progressive taxes
Taxes on income in the United States are progressive taxes, but other types of taxes are also progressive.Estate Taxes
For example, there is a progressive rate for the estate tax. It is imposed at a maximum rate of 40 percent on the total value of assets that are bequeathed to living beneficiaries in amounts that are greater than $11.7 million as of 2021 (an increase from the previous threshold of $11.58 million in 2020). This tax was made less progressive as a result of President Trump's tax plan, which effectively doubled the exemption level for 2018.Obamacare Taxes
The taxes imposed by the Affordable Care Act also referred to as Obamacare taxes, are progressive as well. Only individuals whose annual income, which includes dividends and capital gains, is greater than $200,000, or $250,000 for those who are married and file their taxes jointly, are subject to the additional tax of 3.8% on their net investment income. The additional Medicare tax adds 0.9 percentage points to the Medicare hospital tax that is already applied to income and profits from self-employment that are above these thresholds. In 2018, these taxes brought in a total of $30,1 billion. They had an impact on the top five percent of tax returns that people submitted.Tax Credit
Credits on taxes paid by the poor are also considered progressive. They are deducted from the amount of tax that is due as opposed to the gross income. Even credits are exclusive to people whose income falls below a certain threshold.- To a certain extent, one can claim the income tax credit for each qualifying dependent up to the earned amount. Because it is refundable, the taxpayer is entitled to a refund if the credit they received exceeds the amount of tax they owe.
- Those 65 years old or older or forced into retirement due to a disability are eligible for the elderly and disabled tax credit. Those with incomes well below the threshold for qualification can apply for it.
- The child tax credit amount is set, and it is designed to benefit low-income families more.
- The credit for contributions to retirement savings accounts is only available up to a certain income threshold.
Notable Happenings
There has been an increase in the amount of support for making the income tax in the United States more progressive. Alexandria Ocasio-Cortez, a Democrat representing New York, has proposed a tax rate of 70 percent on incomes that are greater than $10 million. A plan like this one would increase total federal revenues by $291 billion between 2019 and 2028. According to the results of a poll, more than half of voters in the United States are in favor of it. The government could fund the Green New Deal thanks to the additional revenue. Elizabeth Warren, a Democrat from Massachusetts, has included a proposal for a progressive wealth tax as part of her platform for the 2020 presidential election. A tax of 2% would be levied on assets worth more than $50 million, and that tax would increase to 3% on assets worth more than $1 billion. According to the Tax Foundation, this would generate $2.75 trillion in revenue over ten years from the 75,000 families it would affect.Key Takeaways
- With a progressive tax, those in higher income brackets are subject to a higher overall tax rate.
- This includes income taxes, taxes on the Affordable Care Act (ACA), taxes on estates, and earned income tax credits in the United States.
- The regressive tax structure opposes the progressive tax structure.
- The purchasing power of low-income people can be increased through progressive taxation, which also helps the economy.
