Definition and Examples of Progressive Tax
With a progressive tax, the tax burden is higher for the wealthy than it is for those with lower incomes. This kind of tax helps lower-income families pay for basics such as shelter, food, and transportation. A progressive tax allows them to spend a larger share of their incomes on cost-of-living expenses.
Progressive tax systems improve the poor's ability to purchase everyday items as well, increasing economic demand.
A progressive tax doesn't hurt the wealthy as much, because, even after the tax, they can afford the basics and more, although it may decrease their ability to invest in stocks or purchase luxury items.
With a progressive tax, the person with the lower income would pay a lower tax rate than the person with higher income. An example would be if one person earns $12,000 in a year, and another person earns $120,000. They would be taxed differently under a progressive tax system. The lower-income person might pay 10%, or $1,200, in taxes, leaving them with $10,800 to cover all of their needs. The person with the higher income would pay a higher tax rate. Say their $120,000 in income was taxed at 24%, which would be $28,800. They would still have $91,200 left over for expenses.
How Does a Progressive Tax Work?
With a progressive tax, rates are set at specific income levels, with the highest levels paying the most.
In the U.S., federal income tax is a progressive tax. People who make less than $9,950 pay 10% in taxes, while people who make more pay a higher rate of tax (up to 37%).
There are several different tax brackets, or groupings, of taxable income, which are taxed at different rates.
These are the 2021 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|
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.
Types of Progressive Tax
U.S. income taxes are progressive taxes, but so are other types of taxes.
The estate tax, for instance, 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.
Affordable Care Act taxes, also known as Obamacare taxes, are also 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.
Tax credits for the poor are also progressive. They're subtracted from the tax owed rather than from gross income. Some credits are even 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 refundable, so the taxpayer receives a refund if the credit is more than the tax they owe.
- 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.
- The child tax credit is a fixed amount that means more to the poor.
- The retirement savings contribution credit is only available up to a certain income threshold.
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. Such a plan 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.
- 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 of progressive taxes.
- Progressive taxation improves the poor’s purchasing power and stimulates the economy.
U.S. Department of Agriculture. "Quantifying the Impact of SNAP Benefits on the U.S. Economy and Jobs." Accessed July 3, 2021.
Internal Revenue Service. "Revenue Procedure 2019-44." Pages 5-7. Accessed July 3, 2021.
Tax Policy Center. “Historical Highest Marginal Income Tax Rates.” Accessed July 3, 2021.
Internal Revenue Service. "What's New—Estate and Gift Tax." Accessed July 3, 2021.
Internal Revenue Service. "Questions and Answers on the Net Investment Income Tax." Accessed July 3, 2021.
Internal Revenue Service. "Individual Income Tax Returns Complete Report 2018," Pages 25-26. Accessed July 3, 2021.
Internal Revenue Service. "Earned Income Tax Credit (EITC)." Accessed July 3, 2021.
Internal Revenue Service. “Credit for the Elderly or the Disabled at a Glance.” Accessed July 3, 2021.
Internal Revenue Service. “Topic No. 602 Child and Dependent Care Credit.” Accessed July 3, 2021.
Internal Revenue Service. “Retirement Savings Contributions Credit (Saver’s Credit).” Accessed July 3, 2021.
Tax Foundation. “How Much Revenue Would 70% Top Tax Rate Raise? An Initial Analysis.” Accessed July 3, 2021.
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Tax Foundation. “2020 Wealth Tax, Analysis of Sen. Warren and Sen. Sanders’ Wealth Tax Plans.” Accessed July 3, 2021.