Progressive Tax

What Is Progressive Tax?

A progressive tax is a kind of tax in which the tax rate increases as the taxpayer’s income increases. 

Deeper Definition

A progressive tax is a taxation system where the tax rate increases when the taxpayer’s income increases and decreases when the taxpayer’s income decreases. In this type of tax system, high-income earners pay higher taxes than low-income earners.

The goal of progressive taxes is to reduce the burden of taxation on people with a lower ability to pay by transferring it to those who have a higher power to deliver. It is also used to tackle the inequality problem that exists between lower-income earners and income earners. With the system, the government seeks to alleviate the societal ills associated with income inequality.

A regressive tax is the opposite of a progressive tax. A regressive tax is a taxation system where the tax rate decreases as the taxpayer’s income increases. Unlike a progressive tax, where high-income earners pay higher taxes, lower-income earners pay higher taxes in a regressive tax system.

Some of the advantages include:

• Reduces burden on the poor: Increasing the tax rate for the rich who can afford to pay minimizes the tax burden on the poor. 

• Lower economic inequality: It helps increase the disposable income of low-income households and decrease that of high-income households.

• Higher revenue for the state: The government generates higher incomes thanks to the higher taxation on the rich.

Some of the disadvantages include:

• Encourages falsification of income: When people are taxed more when they earn more, some may report lower earnings to avoid paying higher taxes.

• Eliminates the incentive to work hard:  It does not motivate lower-skilled workers to acquire the skills needed to obtain a higher-wage job.

Progressive Tax Example 

Victoria pays an income tax of 5% on her $50,000 salary. By working hard and acquiring more knowledge in her field, she is promoted at work, and her income is increased to $95,000. Now Victoria pays an income tax of 8%.