Progressive tax
A progressive tax is a tax in which the tax rate increases as the taxable amount increases.[1][2][3][4] The term progressive refers to the way the tax rate progresses from low to high, with the result that a taxpayer's average tax rate is less than the person's marginal tax rate.[5][6] The term can be applied to individual taxes or to a tax system as a whole. Progressive taxes are imposed in an attempt to reduce the tax incidence of people with a lower ability to pay, as such taxes shift the incidence increasingly to those with a higher ability-to-pay. The opposite of a progressive tax is a regressive tax, such as a sales tax, where the poor pay a larger proportion of their income compared to the rich (eg spending on groceries and food staples varies little against income, so poor pay similar to rich even while latter has much higher income)[4]
The term is frequently applied in reference to personal income taxes, in which people with lower income pay a lower percentage of that income in tax than do those with higher income. It can also apply to adjustments of the tax base by using tax exemptions, tax credits, or selective taxation that creates progressive distribution effects. For example, a wealth or property tax,[7] a sales tax on luxury goods, or the exemption of sales taxes on basic necessities, may be described as having progressive effects as it increases the tax burden of higher income families and reduces it on lower income families.[8][9][10]
Progressive taxation is often suggested as a way to mitigate the societal ills associated with higher income inequality,[11] as the tax structure reduces inequality;[12] economists disagree on the tax policy's economic and long-term effects.[13][14][15] One study suggests progressive taxation is positively associated with subjective well-being, while overall tax rates and government spending are not.[16]
Educational attainment[edit]
Economist Gary Becker has described educational attainment as the root of economic mobility.[34] Progressive tax rates, while raising taxes on high income, have the goal and corresponding effect of reducing the burden on low income, improving income equality. Educational attainment is often conditional on cost and family income, which for the poor, reduces their opportunity for educational attainment.[35][36] Increases in income for the poor and economic equality reduces the inequality of educational attainment.[37][38] Tax policy can also include progressive features that provide tax incentives for education, such as tax credits and tax exemptions for scholarships and grants.[39][40]
A potentially adverse effect of progressive tax schedules is that they may reduce the incentives for educational attainment.[15][36][41] By reducing the after-tax income of highly educated workers, progressive taxes can reduce the incentives for citizens to attain education, thereby lowering the overall level of human capital in an economy.[15][36][41] However, this effect can be mitigated by an education subsidy funded by the progressive tax.[42] Theoretically, public support for government spending on higher education increases when taxation is progressive, especially when income distribution is unequal.[43]
Loopholes[edit]
The current United States tax code has been criticized by many who believe that the nation's wealthiest are not paying their fair share. This is because the current tax system charges the individual based on wages and not investment income, an area where the upper-class make most of their money. Prominent investor Warren Buffett has been a strong voice in support of taxing the rich proportional to investment income as well as wages. Buffett famously pointed out that if you analyzed every employee in his office including himself, he is quoted saying, "I'll probably be the lowest paying taxpayer in the office."[44] This support ultimately led to the proposal of "The Buffett Rule" by President Barack Obama which proposed a 30% minimum tax on people making more than $1 million a year.[45] The aim of the Buffett Rule was to ensure that investment income would constitute as a taxable income instead of simply wages. Ultimately, the rule was rejected by congress in March 2012. President Joe Biden attempted to do what President Obama could not and introduced the "Paying a Fair Share Act" which followed the Buffett's Rule philosophy. As of August 2023, the bill has not picked up steam in congress. Those that take advantage of these tax codes in the United States include some of the most wealthy and prominent. It is said that Jeff "Bezos reportedly paid no federal income taxes at all in 2007 and 2011, while Elon Musk paid none in 2018."[46] Despite technological advancements and efforts by contemporary reformers to promote equity in tax collection, the system continues to grapple with issues such as tax evasion, corruption, and inequality.
There are two common ways of computing a progressive tax, corresponding to point–slope form and slope–intercept form of the equation for the applicable bracket. These compute the tax either as the tax on the bottom amount of the bracket plus the tax on the marginal amount within the bracket; or the tax on the entire amount (at the marginal rate), minus the amount that this overstates tax on the bottom end of the bracket.
For example, suppose there are tax brackets of 10%, 20%, and 30%, where the 10% rate applies to income from $1 to 10,000; the 20% rate applies to income from $10,001 to 20,000; and the 30% rate applies to all income above $20,000. In that case the tax on $20,000 of income (computed by adding up tax in each bracket) is . The tax on $25,000 of income could then be computed two ways. Using point–slope form (tax on bottom amount plus tax on marginal amount) yields:
Alternatively, 30% tax on $20,000 yields , which overstates tax on the bottom end of the top bracket by , so using slope–intercept form yields:
In the United States, the first form was used through 2003, for example (for the 2003 15% Single bracket):[52]
From 2004, this changed to the second form, for example (for the 2004 28% Single bracket):[53]
United States: State by state case study[edit]
In the United States, states and federal taxes are two different entities. The United States government outlines their progressive tax codes, and the states do the same. Most states include a progressive income tax which can range from 1% to 13.5%. However, some states, seven to be exact, (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming), do not charge a state income tax at all.[77] These states often raise taxes in other areas to offset the states lack of income from income tax. For example, sales, excise, and property taxes may be higher in these states than states with income taxes to find a balance. Clearly, tax rates vary drastically depending on where you live. You can pay as high as a 79.5% income tax rate in Belgium, and 0% in certain states in the United States, not including the United States' federal progressive income tax rate.