Introduction
A tax is said to be progressive if the typical tax burden rises together with an individual's income level. Families with high incomes face a disproportionately large tax burden, whereas taxpayers with low and moderate incomes shoulder a comparatively modest portion of the tax burden. One of the main arguments that favour a progressive tax is that persons with lower incomes would bear an unfairly large share of the burden of paying a flat percentage tax. Although the monetary amount that is due may be less, the impact on the person's actual ability to spend money is far more significant. The degree to which a tax structure is progressive is directly proportional to the amount of the tax burden that is passed to those with higher earnings. If one set of tax laws has a low rate of 10% and a high rate of 30%, and another set of tax laws has rates that range from 10% to 80%, the last set of tax laws is considered to be the more progressive of the two. Here you’ll learn more about what Is Progressive Tax.
Advantages of a Progressive Tax
A progressive tax system has the advantage of reducing the tax burden placed on those who are least able to pay it. This leaves more money in the pockets of low-wage people, who are likely to spend all of that money on necessities, stimulating the economy. This leaves more money in the coffers of low-wage earners. A progressive tax system also tends to collect more taxes than either a flat or a regressive one, as a progressive tax system collects the most significant percentage of taxes from the most considerable sums of money. A progressive tax structure also forces those with the most significant amount of money to support a higher share of the services that are relied on by all people and businesses, such as the upkeep of roads and the protection of the public.
Disadvantages of a Progressive Tax
Some people believe that progressive taxes are a barrier to achievement and should be avoided at all costs. They also criticise the system as a method of economic redistribution since, in their view, it unfairly punishes wealthy people and even those in the middle class. Those opposed to the progressive tax are typically those who advocate for lower overall taxes and proportionately fewer services provided by the government.
A Regressive Tax Vs A Progressive Tax
Compared to progressive taxes, regressive taxes lessen the purchasing power of people with lower earnings compared to those with higher incomes. One example of a regressive tax is the sales tax levied on all purchases. If two persons from different socioeconomic backgrounds buy the same quantity of groceries, they will end up paying the same sales tax. On the other hand, the less fortunate individual has spent a more significant amount of their income on the essentials above.
To What End Is A Progressive Tax Structure Put In Place?
Individuals who bring in more money should not be expected to bear an excessively disproportionate amount of the financial burden of funding government regulation and infrastructure, which is why progressive taxation was created. Those who make less money pay a smaller percentage of their income in taxes, while those who make more money pay a higher percentage. More money is brought in through taxation due to higher tax rates applied to more excellent salaries.
Distinctions between Progressive Tax Structures
Although the United States has a progressive income tax system, many other countries also have progressive taxation.
Revenue Sharing
For example, there is a graduated rate for the estate tax. The highest rate that will be imposed on the total value of assets passed to surviving beneficiaries will be increased to 40% beginning in 2021, which is an increase from the cap of $11.58 million that will be in place in 2020.
Taxes on Obamacare
Similarly, the taxes imposed due to the Patient Protection and Affordable Care Act, also known as Obamacare, have a progressive character. If your yearly income, which includes dividends and capital gains, is more than $200,000, or if you're married and filing jointly, it's more than $250,000, you'll be liable to the 3.8% Net Investment Income Tax. This tax does not apply to individuals whose income falls below these thresholds. On top of these criteria, taxpayers are required to pay an additional 0.9% in Medicare hospital tax on their earned income and the earnings from their self-employment. 5 This revenue stream brought in $30.1 billion in the year 2018. These alterations were visible to the top five percent of taxpayers.
Tax Breaks
The tax credits for low-income individuals also follow a progressive structure. They are subtracted from the total amount owed rather than factored into the computation of taxable income. Additionally, not everyone is eligible to receive every credit. You are eligible to receive a portion of the earned income tax credit provided that you have dependents who meet the requirements. If the total amount of the credit is higher than the total amount of tax the taxpayer is responsible for paying, then the taxpayer is entitled to a refund of the difference. People 65 years old or older or who have retired owing to a disability are eligible for the credit for the elderly and disabled. The only people who qualify are those whose annual incomes fall below a particular cutoff point. Because it is a predetermined amount, the child tax credit is more beneficial to families with lower incomes. To phrase it another way, the tax credit for contributions to retirement savings is only available up to a certain income threshold
Conclusion
People with higher incomes are expected to pay a more significant percentage of their income in taxes under the progressive tax system. There are tiers and brackets for income tax. When a taxpayer's annual income reaches a certain threshold, they are subject to a higher rate of tax than was previously applicable. Taxpayers with higher incomes are subject to higher tax rates, whereas taxpayers with lower incomes pay lower taxes. The government utilises a method of taxation that is progressive.
