Many citizens accept the essential case for the progressive tax: If you have more, you should contribute more to the community or society that's the foundation of your affluence.
Some say, however, that the U.S. income tax is regressive in that, in a practical sense, those who earn less money pay a higher percentage of their income to the government in the form of taxes than do the rich. Consequently, efforts are taken now and then to make the tax code less regressive, or a little fairer by making it a bit more progressive. Here are some pros and cons of progressive taxes and a description of the same.
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What Is a Progressive Tax?
A progressive tax is income-based, meaning different tax rates are applied to various income levels. Under a progressive tax system, the higher your income, the higher your tax burden.
In theory, a high-income family will incur a higher tax burden than will a low- or middle-income taxpayer. The fact is, however, that the income of a high-income family will likely consist of capital income and labor compensation, or capital income only. The inclusion of the capital income means that these families may report no or low income on their tax returns due to the delay in income recognition made possible by investments.
Advantages of Progressive Tax
The benefits of a progressive tax are many:
Shifts More Tax Burden to Wealthy
A progressive tax shifts more of the burden of taxation onto wealthier taxpayers. The more progressive the tax measures, the more the wealthy assume their fair share of the burden of taxation.
Tax Burden Is Proportionate to Income
The progressive tax is a rational alternative to a flat percentage tax, which places a disproportionate burden on taxpayers with low incomes. While the dollar amount owed by a low-income worker may be smaller under a flat percentage tax system, the negative effect of the tax on the family's spending power is greater.
The progressive tax counters this issue by allocating the tax burden according to the individual's income.
Counterbalances Rise in Economic Inequality
A progressive tax is a means to counterbalance a rise in economic inequality, which the Pew Research Center says is illustrated by the fact that in 2018, the highest-earning 20 percent of U.S. households earned 52 percent of the total U.S. income. What's more, the share of all U.S. income earned by the top 5 percent of households, with incomes of $248,729 or more in 2018, rose from 16 percent in 1968 to 23 percent in 2018.
Disadvantages of Progressive Tax
The progressive tax is not without its disadvantages:
Disincentive to High-Income Earners
For some, a progressive tax acts as a disincentive for getting a job that pays a higher wage. For instance, some retirees may choose jobs that pay a lower wage to ensure their tax rates don't change.
This disincentive has been studied by some economists. For example, the Laffer Curve, a theory of the supply-side economist Arthur Laffer, demonstrates the relationship between tax rates and the amount of tax revenue collected by governments. The curve illustrates the point at which a decrease in the tax rate could increase tax revenue.
Income Redistribution Punishes the Rich
In effect, a progressive tax redistributes money from the rich to the poor in that the taxes fund the subsidies that benefit the poor. Some economists say a better approach is to use the tax revenue to fund projects, such as public works and education, that might lead to better jobs for the poor.
Disincentive to Low-Income Workers
Taxing high-income citizens and redistributing their wealth to low-wage earners may eliminate the incentive for lower-skilled workers to acquire the skills needed to enter the labor market or obtain a job that pays a higher wage. According to some economists, it eliminates the need to work hard, learn new skills or look for new ways to earn a higher income.
A progressive tax applies different tax rates to various income levels. Under a progressive tax system, the higher your income, the higher your tax burden. Like any tax scheme, the progressive tax has its advantages and disadvantages.
- Pew Research Center: Views on Economic Inequality
- Pew Research Center: 6 facts about economic inequality in the U.S.
- Tax Foundation: Progressive Tax
- Tax Policy Center: TaxVox: Individual Taxes
- Washington Post: Trump is giving Arthur Laffer the Presidential Medal of Freedom. Economists aren’t smiling.