What Is the Difference Between Progressive, Regressive & Proportional Taxes?

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Taxes in the United States are a mix of progressive, regressive and proportional taxes levied by federal, state and local governments. These entities collectively impose personal and corporate income taxes, Social Security and other social welfare taxes, sales taxes, inheritance taxes, excise taxes, real estate taxes and personal property taxes, among others.

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The difference between progressive, regressive and proportional tax systems lies in how the government assesses a taxpayer's tax liability or obligation.

Progressive Tax Systems

A progressive tax system means the proportion of income paid in taxes increases as the taxpayer's income increases. In short, a progressive tax system shifts the tax burden toward the wealthy. The federal income tax is an example of a progressive tax, where the tax rate increases as taxable income increases.

The U.S. and most states impose income taxes on wages, salaries, self-employment income and business profits, as well as on "unearned" income from other sources. The income tax system allows individuals and businesses to use a variety of exclusions and deductions to reduce taxable income.

Understanding Regressive Taxes

A regressive tax system means low-income people pay a larger proportion of income in taxes than do wealthy people. Basically, a regressive tax system shifts the tax burden toward lower-income taxpayers. Sales taxes are regressive, because lower-income families tend to spend a larger proportion of their income on taxable goods than do wealthy families.

Real estate property taxes also tend to be regressive because they are based on the appraised value of property rather than on the taxpayer's ability to pay, and because lower-income taxpayers tend to have more of their assets in taxable real estate than wealthy taxpayers.

Proportional Tax Systems

Proportional tax systems, also known as flat-tax systems, apply the same tax rate to all taxpayers. Examples include flat-rate income taxes, gross receipts taxes, occupation taxes, amusement admission taxes and per-capita taxes. In theory, this system should take an equal proportion of everyone's income because everybody is paying the same rate.

In practice, however, the proportional system doesn't translate to equal sacrifice. That's because the marginal worth to you of each dollar is greater when you have fewer total dollars. A proportional tax example whereby a taxpayer pays $1,000 of his $10,000 pay in taxes is making a greater sacrifice than the one who pays $10,000 of his $100,000 pay, even though both are paying a tax of 10 percent.

Multiple Category Taxes

Some taxes fall into different categories at the same time, depending on how they affect taxpayers. For example, the federal Social Security tax can be classed as a proportional tax because all taxpayers pay the same rate. But it can also be considered regressive because liability stops when the taxpayer reaches $137,700 for the 2020 tax year (up from $132,900 for 2019) in earnings.

Any earnings above that level aren't taxed. A taxpayer earning $137,700 in 2020 would see all his earnings taxed, while a taxpayer earning $200,000 would be taxed only on the first $137,700.

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