Progressive Taxes With Examples
How a Progressive Tax System Helps the Economy
A progressive tax imposes a higher rate on the wealthy than on the poor. It's based on the taxpayer's ability to pay.
Poor families spend a larger share of their incomes on cost of living expenses. They need all the money they earn to purchase and pay for basics like shelter, food, and transportation. A tax decreases their ability to afford a decent standard of living by subtracting from their income.
The wealthy can afford the basics. A tax decreases their ability to invest in stocks, add to retirement savings, or purchase luxury items.
U.S. Tax Rates and Brackets
The U.S. income tax is progressive. The tax rates get higher as income increases. These are the 2019 income tax rates and brackets for single taxpayers and married couples filing jointly. The income levels represent taxable income, or what's left after all exemptions and deductions have been taken.
|12%||$9,701 - $39,475||$19,401 - $78,950|
|22%||$39,476 - $84,200||$78,951 - $168,400|
|24%||$84,201 - $160,725||$168,401 - $321,450|
|32%||$160,726 - $204,100||$321,451 - $408,200|
|35%||$204,101 - $510,300||$408,201 - $612,350|
There's 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. 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., has 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.
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.
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 t0 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 regressive. It's 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. But 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 is $132,900 in 2019, so those who earn more than this don'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.