Progressive Taxes With Examples
How a Progressive Tax System Helps the Economy
A progressive tax imposes a higher rate on the rich than on the poor. It's based on the taxpayer's income or wealth.
It's done to help lower-income families pay for basics like shelter, food, and transportation. A progressive tax allow them to spend a larger share of their incomes on cost of living expenses. A flat tax or regressive tax decreases their ability to afford a decent standard of living. They subtract a larger percentage of income from the poor than from the rich.
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, add to retirement savings, or purchase luxury items.
- A progressive tax imposes a greater tax rate on higher-income brackets.
- They include 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. It's 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|
U.S. tax rates used to be more progressive than they are today. The U.S. top rate was more than 70% from 1936-1964 and then again from 1968-1970. In 1944 and 1945, the highest top rate was 94% to pay for World War II.
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. It 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 $37 billion in 2018. They affected the top 1% of earners the most, according to the Tax Policy Center.
The Estate Tax
The estate tax is progressive. It's levied on the total value of assets passed to living beneficiaries at a rate of 40% on amounts greater than $11.4 million as of 2019.
The Trump tax plan virtually doubled the exemption level for this tax in 2018, making it less progressive.
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, and this 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's refundable. The taxpayer receives a refund if the credit is more than the tax she owes.
- The elderly and disabled tax credit is awarded to those 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. But it's regressive because most poor families don't make enough to save anything for retirement.
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. The wage base was $132,900 in 2019. Those who earned more than this didn'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. As a result, they can't 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 that tax money on services for the poor.
Obamacare ensures that the poor can afford preventive health care, thus lowering everyone's costs. The cost of emergency room care for the uninsured is a staggering $10 billion a year. Hospital care makes up one-third of all health care costs in America. More than 46% of those who visit the emergency room do so because they have no other place to go for health care. That's especially true for the uninsured. This cost gets shifted to your health insurance premiums and to Medicaid.
The poor are more likely to get preventive care when they can afford health insurance. They 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. A study by Economy.com found that every dollar spent on food stamps stimulates $1.73 in demand because that $1 creates a ripple effect. A dollar spent at the grocery store pays for the food, but it also helps to pay the clerk's salary, the truckers who haul the food, and even the farmer who grew it. The clerks, truckers, and farmers then make purchases of their own, which pays even more employees and workers. With strong demand, there's no need to lay off employees.
Tax breaks for the wealthy have a much weaker effect. Business tax breaks only generate 33 cents for every revenue dollar lost.
The goal of progressive taxation is to stimulate the economy and make sure every citizen has a minimum standard of living. Over the long run, it lowers health care costs and provides a strong labor force.
IRS. “Understanding Taxes, Lesson 3: Progressive Taxes,” Accessed April 30, 2020.
Tax Foundation. “2020 Tax Brackets,” Accessed April 30, 2020.
Tax Policy Center. “Historical Highest Marginal Income Tax Rates,” Accessed April 30, 2020.
Tax Foundation. “How Much Revenue Would 70% Top Tax Rate Raise? An Initial Analysis,” Accessed April 30, 2020.
Tax Foundation. “2020 Wealth Tax, Analysis of Sen. Warren and Sen. Sanders’ Wealth Tax Plans,” Accessed April 30, 2020.
IRS. “Basics of the Net Investment Income Tax,” Accessed April 30, 2020.
Congress.gov. “H.R. 3590 – Patient Protection and Affordable Care Act,” Accessed April 30, 2020.
Tax Policy Center. “Briefing Book, Key Elements of the U.S. Tax System,” Accessed April 30, 2020.
Congress.gov. “H.R. 1- An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” Accessed April 30, 2020.
Administration for Children & Families, Archives. “Income Tax Credit for Low-Income Individuals and Families,” Accessed April 30, 2020.
IRS. “Credit for the Elderly or the Disabled at a Glance,” Accessed April 30, 2020.
IRS. “Publication 503(2019), Child and Dependent Care Expenses,” Accessed April 30, 2020.
IRS. “Retirement Savings Contributions Credit (Saver’s Credit),” Accessed April 30, 2020.
Social Security. “Contribution and Benefit Base,” Accessed April 30, 2020.
IRS. “How Much is My Standard Deduction?” Accessed April 30, 2020.
IRS. “Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans,” Accessed April 30, 2020.
IRS. “Topic No. 456 Student Loan Interest Deduction,” Accessed April 30, 2020.
Centers for Disease Control and Prevention. “Health Statistics: Measuring Our Nation’s Health, NCHS Fact Sheet, February 2019, PDF Version,” Accessed April 30, 2020.
Centers for Disease Control and Prevention. “Emergency Room Use Among Adults Aged 18-64: Early Release of Estimates from the National Health Interview Survey, January – June 2011,” Accessed April 30, 2020.
Moody’s Economy.com. “Assessing the Macro Economic Impact of Fiscal Stimulus 2008,” Accessed April 30, 2020.