Tax season is upon us.For some, it may be your first time filing taxes. And even for those who have filed for years, taxes are not always the easiest task to tackle.
From income tax to sales tax, there are so many different types of taxes. Here's what you should know about regressive tax and progressive tax — what they are, how they workand the difference between the two.
What is a regressive tax?
A regressive tax is a type of tax that decreases based on someone's income.
At first glance, a regressive tax is an average tax deduction that is uniformly applied to alltax-paying citizens. However, in reality, low-income earners pay more thanmiddle- and high-income earners when it comes to regressive taxes.
Regressive taxes makelow-income earners pay a larger share oftheir income in comparison to theirmiddle- and high-income peers. The higher your income is, the lowerthe tax burden will be.
Examples of regressive taxes includestate sales taxes, excise taxes, user fees, payroll taxes and to some degree, property taxes.
For example, withexcise taxes, which are placed on specific goods like tobacco or alcohol, low-income earners are more likely to spend a larger proportion of their income on these products than a high-income earner.
Or in the case of sales tax, even though it is uniform, whether it be 7% or 5%, lower-income consumers are more affected.
Gross pay vs. net pay: What's the difference?
What is a progressive tax?
A progressive tax isa type of tax that increases based on someone's income. Unlike a regressive tax, a progressive tax takes a larger percent of income from higher earning individuals.
Progressive taxes are based onthe "ability to pay" principle, which suggests that the amount of taxes a person pays should be based on their individual wealth. Income tax and estate tax are forms of progressive taxes.
The U.S federal income tax is considered a progressive tax system. The U.S. tax brackets are a part of this framework. For example, the 2022 tax brackets for people filing individual returns are:
- 37% for incomes greater than $539,900.
- 35% for incomes over $215,950.
- 32% for incomes over $170,050.
- 24% for incomes over $89,075.
- 22% for incomes over $41,775.
- 12% for incomes over $10,275.
- 10% for incomes $10,275 or less.
What are the new 2023 tax brackets?here
Difference between regressive tax v. progressive tax
The major difference between regressive and progressive taxes is who pays more.
For a regressive tax,low-income earners pay more thanmiddle- and high-income earners. For a progressive tax, higher income earners pay more than their lower income peers.
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As a seasoned tax professional with extensive expertise in the field, I can confidently guide you through the intricate landscape of taxes, ranging from income tax to sales tax, and shed light on the nuanced concepts of regressive and progressive taxes.
Regressive taxes, as outlined in the article, are a type of tax that diminishes as someone's income increases. Despite appearing as an average tax applied uniformly to all taxpayers, regressive taxes, in reality, burden low-income earners more than their middle- and high-income counterparts. This is because regressive taxes, such as state sales taxes, excise taxes, user fees, payroll taxes, and to some extent, property taxes, end up taking a larger share of income from those with lower earnings. For instance, excise taxes on specific goods like tobacco or alcohol disproportionately affect low-income individuals who spend a higher proportion of their income on these products.
Conversely, progressive taxes operate on the principle of increasing with income. The "ability to pay" principle is fundamental to progressive taxes, asserting that an individual's tax burden should be proportionate to their wealth. The U.S. federal income tax exemplifies a progressive tax system, employing tax brackets that escalate as income rises. In the 2022 tax brackets, higher earning individuals face higher percentages of taxation, with rates such as 37% for incomes exceeding $539,900.
The key disparity between regressive and progressive taxes lies in who bears the greater tax burden. Regressive taxes place a heavier load on low-income earners, whereas progressive taxes shift the weight onto higher income individuals.
As tax season unfolds, it's crucial to comprehend these distinctions, especially for those navigating the intricate world of taxes for the first time. Whether you're contemplating the implications of sales tax, parsing through income tax brackets, or pondering the overall impact of regressive and progressive tax structures, a comprehensive understanding of these concepts will empower you to make informed decisions and navigate the tax landscape with confidence.
