Progressive Taxes With Examples

How a Progressive Tax System Helps the Economy

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A progressive tax imposes a higher rate on the rich than on the poor. It's based on the taxpayer's income or wealth.

This type of tax helps lower-income families pay for basics like shelter, food, and transportation. A progressive tax allows them to spend a larger share of their incomes on cost-of-living expenses.

A flat tax or regressive tax could decrease the ability of low-income taxpayers to afford a decent standard of living.

A progressive tax doesn't hurt the wealthy as much, because, even after the tax, they can afford the basics. A tax decreases their ability to invest in stocks or purchase luxury items, however.

Key Takeaways

  • A progressive tax imposes a greater tax rate on higher-income brackets. 
  • In the United States, this includes income taxes, ACA taxes, estate taxes, and earned income tax credits.
  • Regressive taxes are the opposite.
  • Progressive taxation improves the poor’s purchasing power and stimulates the economy.

U.S. Tax Rates and Brackets 

The U.S. income tax is progressive. The tax rates get higher as income increases.

These are the 2020 income tax rates and brackets for single taxpayers, married couples filing jointly, and heads of household. The income levels represent taxable income, or what's left after all exemptions and deductions have been taken.           

Rate Single, Taxable Income Over Married/Joint, Taxable Income Over Head of Household, Taxable Income Over
10%            $0            $0            $0
12%     $9,875   $19,750   $14,100
22%   $40,125   $80,250   $53,700
24%   $85,525 $171,050   $85,500
32% $163,300 $326,600 $163,300
35% $207,350 $414,700 $207,350
37% $518,400 $622,050 $518,400

U.S. tax rates used to be more progressive than they are today. The U.S. top rate was more than 70% from 1936 to 1964, and then again from 1968 to 1970.

In 1944 and 1945, the highest top rate was 94%, to pay for World War II.

Recent Developments 

There has been growing support to make the U.S. income tax more progressive.

Representative Alexandria Ocasio-Cortez, D-N.Y., proposed a 70% tax rate on incomes above $10 million. It would add $291 billion to federal revenues between 2019 and 2028.

A survey found that more than half of U.S. voters support it. The added revenue would fund the Green New Deal.

Senator Elizabeth Warren, D-Mass., proposed a progressive wealth tax as part of her 2020 presidential platform. It would levy a 2% tax on assets above $50 million, rising to 3% on assets above $1 billion.

This would raise $2.75 trillion from the 75,000 families it would affect over 10 years, according to the Tax Foundation. 

Investment Income Taxes 

Obamacare taxes are progressive. The 3.8% Net Investment Income Tax only applies to those who earn more than $200,000 a year, or $250,000 for those who are married and file jointly, including dividends and capital gains.  

The additional Medicare tax levies an additional 0.9% Medicare hospital tax on income and self-employment profits above these thresholds.

These taxes raised $30.1 billion in 2018. They affected the top 5% of tax returns filed.

The Estate Tax 

The estate tax is progressive. It's levied on the total value of assets passed to living beneficiaries at a top rate of 40% on amounts greater than $11.7 million as of 2021 (up from $11.58 million in 2020).

The Trump tax plan virtually doubled the exemption level for this tax in 2018, making it less progressive.

Tax Credits 

Tax credits for the poor are also progressive. They're subtracted from the tax owed rather than from gross income. They're progressive, because the amount saved is literally dollar for dollar, which means more to an individual with less income.

Some credits are even more progressive, because they're only available to those living below a certain income level.

  • The earned income tax credit is awarded for each dependent, up to certain income levels. It is very progressive, because it is refundable. The taxpayer receives a refund if the credit is more than the tax he or she owes.

In 2021, the American Rescue Plan expanded eligibility for the EITC in response to economic hardships caused by the COVID-19 pandemic. You may be eligible this year, even if your income was too high to qualify in previous years. Eligibility was also expanded to:

  • More childless households
  • Taxpayers as young as 19, except for full-time students between the ages of 19 and 24
  • Former foster children and homeless youths as young as 18
  • Taxpayers over age 65
  • The elderly and disabled tax credit is awarded to those who are age 65 and older or retired on disability. It's only available to those below a very low-income limit, making it progressive.
  • The child tax credit is progressive, because it's a fixed amount that means more to the poor. 
  • The retirement savings contribution credit is progressive in theory, because it's only available up to a certain income threshold.

Tax software programs can help taxpayers learn which credits they're eligible for during tax season.

Taxes That Aren't Progressive

The Social Security tax is the opposite of progressive. 

First, it's paid at the same rate, regardless of income. Employees pay 6.2% of their income, and their employers match this for a total of 12.4%. Business owners pay 12.4% in the form of self-employment tax.

Employees and business owners don't have to pay the tax on income above a certain level, called the "Social Security wage base." This amount is $142,800 in tax year 2021. Those who earn more than this won't have to pay the Social Security tax on this portion of their incomes. 

Tax deductions are also regressive. The standard deduction is a fixed amount that's subtracted from taxable income, regardless of income.

Above-the-line adjustments to income include deductions for retirement savings, interest on student loans, and health savings accounts. These make the income tax less progressive, because poorer taxpayers aren't likely to have enough income to afford these expenses and take advantage of the deductions.

How Progressive Taxes Affect the Economy

Progressive taxes are a form of income redistribution, because the government spends at least some of the revenue on services for the poor. 

Obamacare ensures that the poor can afford preventive health care, thus lowering everyone's costs.

Hospital care makes up one-third of all health care costs in America. In 2014, about 7% of those who visited the emergency room did so because they had no other place to go for health care. However, that rate was twice as high (15.4%) for the uninsured. This cost gets shifted to your health insurance premiums and to Medicaid.

However, the implementation of the Obamacare expansion in 2014 lowered emergency room visits by the uninsured. Between 2014 and 2016, emergency room visits of uninsured patients declined from 16% to 8%, and overall hospital discharges of uninsured patients dropped from 6% to 4%.

The poor are more likely to get preventive care when they can afford health insurance and can be treated for chronic diseases before they become life-threatening. The result is lower health care costs for everyone.

Progressive tax systems improve the poor's ability to purchase everyday items as well, increasing economic demand.

The goal of progressive taxation is to stimulate the economy and ensure that every citizen has at least a minimum standard of living. Over the long run, it lowers health care costs and provides a strong labor force.