Income taxes are levied by governments on the income of citizens to raise money for government services and programs. Taxes can be regressive or graduated. Regressive taxes tax a smaller percentage of income from wealthier individuals while graduated taxes, also known as progressive taxes, increase as income increases. Graduated income taxes are found in a many countries, including the United States.
What is a Graduated Income Tax?
A graduated income tax is one that imposes a higher tax rate the higher your income. For example, the first $10,000 that you earn might be taxed at a rate of 5 percent, the next $15,000 at 15 percent and any income above $25,000 would be taxed at 30 percent. The tax rates only apply to the income in that category. For example, a person who makes $11,000 would not pay 15 percent on all of their income. Instead, they would pay 5 percent on the first $10,000 and 15 percent on the remaining $1,000 for a total tax bill of $650.
Reasons for a Graduated Tax
Graduated taxes are supported by those who believe that people with higher incomes should pay a larger proportion in taxes than those with smaller incomes. Proponents claim that a graduated tax is fair because those with larger incomes have a larger amount of discretionary spending than poorer individuals. For example, if it takes $20,000 to have a basic standard of living, a person who makes $21,000 only has $1,000 for discretionary spending while a person who makes $50,000 has $30,000 of discretionary spending.
Arguments Against Graduated Taxes
Those who are argue against graduated taxes claim that it unfairly penalizes those who earn more. Opponents claim that it decreases productivity because as a person's income rise, the percentage of their income that they get to take home decreases because the marginal tax rate increases.
History of the Graduated Income Tax in the U.S.
The graduated income tax in the United States started small. In 1913, the income tax was levied on couples who earned more than $4,000, the equivalent of more than $80,000 today, and the rate was only 7 percent. The maximum tax rate peaked at 100 percent very briefly when President Franklin Roosevelt issued an executive order that all income over $25,000 be taxed at a rate of 100 percent. This was quickly overturned by Congress but the tax rate did reach 94 percent at the end of World War II.
Current Graduated Income Tax in the United States
Though rates have decreased significantly since World War II, the United States still uses a graduated income tax. The 2012 federal income tax is broken up into six brackets: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent. The top tax bracket of 35 percent applies to individuals and married couples who make more than $388,350.