A progressive tax takes a higher percentage of tax from people with higher incomes. It means that the more a person earns, the higher his average rate of tax will be.
In this case, the person earning £10,000 is paying 20% of their income in tax (total tax of £2,000)
The person earning £20,000 is paying 30% of their income in tax (total tax of £ 6,000)
The aim of a progressive tax is:
To help reduce inequality – taking lower average levels of tax from low wage earners, and taking more from higher wage earners.
To increase the incentive for people to take low paid jobs, e.g. move off benefits into work. If low-income work has a low incidence of the tax, it encourages people to enter the labour force and take a job.
Marginal tax rates
Progressive taxes make use of marginal tax rates. Income is taxed on the extra income earned, e.g. higher rate of income tax is charged at 40% on income above £36,000
You pay 20% on the income from £10,000 to £31,866 (21,866) = £4,372.20
You pay 40% on income between £31,866 to £40,000 – £8,134 = £3,253
Total tax – £7,625
average tax rate 19%
3. Income is £250,000
You pay 0% on your Personal Allowance of £10,000.
You pay 20% on the income from £10,000 to £31,866 (21,866) = £4,372.20
You pay 40% on income between £31,866 to £150,000 – £118,134 = £47,253.6
You pay 45% on income between £150,000 and £250,000 = £45,000
total tax = £94,372
average tax rate = 37.7%
As income increases, you not only pay more tax, but your average tax rate increases.
Other types of progressive taxes
Capital gains and stamp duty. You could argue taxes like capital gains and stamp duty are progressive. Only people on high incomes will be buying expensive houses. In the UK, rates of stamp duty are also quite progressive.
Is VAT progressive?
VAT has an element of progressivity. People with higher incomes will spend more and therefore pay more VAT. VAT is also excluded from essential items like food. Though people on high incomes tend to save more, so as a proportion of income, VAT payments may be less than low-income people
The opposite of a progressive tax is a regressive tax – a tax which takes a higher percentage of income from low-income earners. (e.g. poll tax)
Other justifications for progressive taxes
The diminishing marginal utility of money. As income increases, the marginal utility of money goes down. For someone on £10,000 a year every £1 is important for meeting living costs. But if your income goes up from £250,000 to £300,000 there is a limited increase in living standards.
Positional externalities. It is argued by some economists that people with high incomes often end up spending money on positional goods, such as larger houses and more expensive cars, expensive art. Non-essential goods. Where there is competition to have prestige. Progressive taxes enable money to be spent on public services like health and education.
Happiness. Some people with high salaries may enjoy making a bigger contribution to society.
Criticisms of progressive taxes
If taxes are too progressive, then people may face a disincentive for getting a better-paid job. e.g. a top rate marginal income tax rate of 80% may encourage people to go and work elsewhere.
Laffer curve
Laffer curve analysis suggests that if marginal income tax increases too much, it may reduce the incentive to work.
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 is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden.
If we take an example of a person earning $70,000 per annum, then his/her tax liability will be computed as follows under the progressive tax system: The first $10,000 at 10% = $1,000. The second $10,000 at 15% = $1,500. The third $10,000 at 20% = $2,000.
The taxes they pay have a greater impact on their standard of living than they do on high-income taxpayers, most of whom can easily afford to pay for the basics. However, critics of progressive tax systems believe they act as a disincentive to hard work and success.
A progressive tax takes a larger percentage of income from high-income groups than from low-income groups and is based on the concept of ability to pay. A progressive tax system might, for example, tax low-income taxpayers at 10 percent, middle-income taxpayers at 15 percent and high-income taxpayers at 30 percent.
A progressive tax has more of a financial impact on higher-income individuals than on low-income earners, with tax rates and tax liability increasing in line with a taxpayer's income. Investment income and estate taxes are examples of progressive taxes in the U.S.
If, for example, taxes for a family with an income of $20,000 are 20 percent of income and taxes for a family with an income of $200,000 are 30 percent of income, then the tax structure over that range of incomes is progressive.
Progressive taxes take more from those able to pay more. Because this method is based on the ability to pay, it is considered the fairest means of taxation. People with higher incomes pay larger amounts of tax because their taxable income is larger.
If you make $60,000 a year living in the region of California, USA, you will be taxed $13,653. That means that your net pay will be $46,347 per year, or $3,862 per month.
The primary argument is that flat taxes can be regressive, placing a proportionately higher burden on lower-income individuals. Since everyone pays the same percentage regardless of income, those with lower earnings might feel the impact more base on the proportion of their income they have to pay.
Nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — do not levy a state income tax. New Hampshire Department of Revenue Administration. Frequently Asked Questions - Interest & Dividend Tax. Accessed Apr 25, 2024.
If you are single and a wage earner with an annual salary of $40,000, your federal income tax liability will be approximately $4,000. Social security and medicare tax will be approximately $3,000. Depending on your state, additional taxes my apply.
Specific economic policies that are considered progressive include progressive taxes, income redistribution aimed at reducing inequalities of wealth, a comprehensive package of public services, universal health care, resisting involuntary unemployment, public education, social security, minimum wage laws, antitrust ...
The major difference between regressive and progressive taxes is who pays more. For a regressive tax, low-income earners pay more than middle- and high-income earners. For a progressive tax, higher income earners pay more than their lower income peers.
Levying a federal income tax became a key goal for many progressive groups, the key argument being that it was fairer for wealthy individuals to pay for the taxes and tariffs that had been largely obliged from the middle class and the poor in society.
The individual income tax is progressive, thanks to the impact of refundable credits for lower-income households (average tax rates are negative for the two lowest income quintiles), the standard deduction (which exempts a minimum level of income from the tax), and a graduated rate structure (rates on ordinary income ...
Defenders of a flat tax argue that the beneficial effects of a progressive tax system could be maintained through generous personal exemptions. A second criticism is that a flat tax would cause shortfalls in the government's budget by lowering the taxes paid by the wealthy.
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