Progressive, Regressive and Proportional Taxes (2024)

There are three main tax systems that are used in the US: progressive tax, regressive tax, and proportional tax. It’s highly likely you pay a version of each – progressive for federal income tax, regressive tax on purchasing goods, and proportional for occupational taxes – so it’s important to understand how each system works, and how they interact with social and economic issues.

Let’s explore what each tax system entails and some proportional, progressive and regressive tax examples.

What is progressive tax?

Under a progressive tax system, tax amounts are assessed based on the individual’s income.

High-income earners pay more than low-income earners, with tax rates and tax liability increasing as wealth increases. The idea is that high-income earners can afford to pay more in taxes, and should do so in order to alleviate some of the burden for low-income earners.

In the US, federal income tax is a progressive tax system. Using marginal tax rates, higher income earners are expected to pay more in income taxes than low-income earners based on the tax bracket they fall into. The percentage rate increases at intervals – with seven different tax brackets currently in place.

While a progressive tax system benefits low earners, critics argue that it penalizes high earners for their success. Those against progressive tax systems feel that in forcing high earners, both individuals and businesses alike, to pay significantly more in taxes, financial success is actually discouraged. Progressive taxes are viewed by many critics as anti-capitalist, and a concept that disrupts the free market economy of the US.

What is regressive tax?

Under a regressive tax system, low-income earners actually pay more taxes than high-income earners – relative to income. Taxes in a regressive system are assessed as a percentage of the value of an asset purchased or owned by the taxpayer. Taxes in a regressive system are not defined or influenced by income level and earnings – everyone simply pays the same percent of taxes for the same product.

The regressive tax system is used in the US for property taxes, sales taxes on goods, and excise taxes on consumables like airfare and gasoline. Sin taxes are a form of excise tax that’s placed on commodities that are said to have a negative or unhealthy effect on society – like tobacco and gambling – and these are also subject to regressive taxes.

Many argue that this has an unfair, disproportionate impact on low-income earners. For example, cigarettes have a federal excise tax of $1.01 per pack. Because this is a regressive tax, that number is not affected by the income capacity of the consumer. $1.01 per pack may not be a tall order for high-income earners, but certainly could be for low-income earners, and this is especially notable considering the fact that the Centers for Disease Control and Prevention (CDC) have indicated that more than half of all smokers in the US are low-income.

In the same sense, a 5% sales tax on groceries is a heftier cost for those making $25,000 than it is for those making $250,000; regressive tax systems mean low earners end up paying a larger portion relative to their income than high earners.

Another example of regressive tax is Social Security taxes. Everyone’s earnings are subject to the same amount – 6.2% – in social security taxes. Medicare taxes are also regressive in the United States.

What is proportional tax?

In a proportional tax system, everyone pays the same percentage of annual income. This fixed rate cannot change if income increases or decreases. If the flat rate is 5%, someone earning $25,000 would pay $1250 in income taxes, while someone earning $250,000 would pay $12,500 in income taxes.

Currently, nine states use a proportional tax system for state income tax: Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah.

Per capita, gross receipts, and occupational taxes are also proportional in the US.

Advocates for a proportional tax system argue that it stimulates the economy and encourages hard work by lifting the penalty that comes with earning more under a progressive system, and encourages businesses to invest and spend more.

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