Regressive vs. Proportional vs. Progressive Taxes: What's the Difference?
Tax systems in the U.S. fall into three main categories: Regressive, proportional, and progressive. Regressive and progressive taxes impact high- and low-income earners differently, whereas proportional taxes do not. Property taxes are an example of a regressive tax; theU.S. federal income tax is a progressive tax example; and occupational taxes are a type of proportional tax.
Regressive taxes have a greater impact on lower-income individuals than on the wealthy. Proportional tax, also referred to as a flat tax, affects low-, middle-, and high-income earners relatively equally. They all pay the same tax rate, regardless of income.
A progressive tax has more of a financial impact on higher-income individuals than on low-income earners, with tax rate, and tax liability, increasing, in line with a taxpayer's income. Investment income and estate taxes are examples of progressive taxes in the U.S.
Key Takeaways
- A regressive tax system levies the same percentage on products or goods purchased regardless of the buyer's income and is thought to be disproportionately difficult on low earners.
- A proportional tax applies the same tax rate to all individuals regardless of income.
- A progressive tax imposes a greater percentage of taxation on higher income levels, operating on the theory that high-income earners can afford to pay more.
Regressive Taxes
Low-income individuals pay a higher amount of taxes compared to high-income earners under a regressive tax system. That's because the government assesses tax as a percentage of the value of the asset that a taxpayer purchases or owns. This type of tax has no correlation with an individual's earnings or income level.
Regressive taxes include property taxes, sales taxes on goods, and excise taxes on consumables, such as gasoline or airfare. Excise taxes are fixed and they're included in the price of the product or service.
Sin taxes, a subset of excise taxes, are imposed on commodities or activities that are perceived to be unhealthy or have a negative effect on society, such as cigarettes, gambling, and alcohol. They're levied in an effort to deter individuals from purchasing these products. Sin tax critics argue that these disproportionately affect those who are less well off.
Many also consider Social Security to be a regressive tax. Social Security tax obligations are capped at a certain level of income called a wage base—$147,000 for the 2022 tax year, rising to $160,200 in 2023. An individual's earnings above this base are not subject to the 6.2% Social Security tax.
The annual maximumthat you can pay in Social Security tax is capped at $9,932.00 in 2023, whether you earn $160,200 or $1 million. Employers pay an additional 6.2% on behalf of their workers, and self-employed individuals must pay both halves on earnings up to the wage base.
Higher-income employees effectively pay a lower proportion of their overall pay into the Social Security system than lower-income employees because it's a flat rate for everyone and because of this cap.
Just as Social Security can be considered a regressive tax, it's also a proportional tax because everyone pays the same rate, at least up to the wage base.
Proportional Taxes
A proportional or flat tax system assesses the same tax rate on everyone regardless of income or wealth. This system is meant to create equality between marginal tax rates and average tax rates paid. Nine states use this income tax system as of 2022: Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah.
Other examples of proportional taxes include per capita taxes, gross receipts taxes, and occupational taxes.
Proponents of proportional taxes believe they stimulate the economy by encouraging people to work more because there is no tax penalty for earning more. They also believe that businesses are likely to spend and invest more under a flat tax system, putting more dollars into the economy.
Progressive Taxes
Taxes assessed under a progressive system follow an accelerating schedule, so high-income earners pay more than low-income earners. Tax rate, along with tax liability, increases as an individual's wealth increases. The goal of a progressive tax is that higher earners pay a higher percentage of taxes and more money in taxes than lower-income earners.
The U.S. federal income tax is a progressive tax system. Its schedule of marginal tax rates imposes a higher income tax rate on people with higher incomes, and a lower income tax rate on people with lower incomes. The percentage rate increases at intervals as taxable income increases. Each dollar the individual earns places him into a bracket or category, resulting in a higher tax rate once the dollar amount hits a new threshold.
The standard deduction and itemized deductions allow individuals to avoid paying taxes on a portion of the income they earn each year. The amount of the standard deduction changes from year to year to keep pace with inflation.
Progressive tax rates have critics. Some say a progressive taxation is a form of inequality with higher earners paying more to a nation that supports lower-income earners. The marginal tax rates for an individual range from 10% to 37% in 2023, with the wealthiest Americans subject to the highest rate. Others argue that the tax code benefits wealthy individuals who can avoid income tax through tax breaks.
In 2022, 40.1% of U.S. citizens did not pay income taxes because their earnings were insufficient to reach the lowest tax rate, according to the Tax Policy Center.Conversely, a study by White House economists concluded that the 400 wealthiest U.S. families paid an average income tax rate of just 8.2 percent from 2010 to 2018, despite high marginal tax rates. Income in the form of unrealized capital gains benefited from a tax code known as "step up in basis," where the unrealized gain on an asset is never subject to income tax if the asset is not sold during the owner’s lifetime.
Estate taxes are another example of progressive taxes as they mainly affect high-net-worth individuals (HNWIs) and they increase with the size of the estate. Only estates valued at $12.92 million or more are liable for federal estate taxes in 2023.
Examples of Regressive, Proportional, and Progressive Taxes
The following examples of regressive, proportional, and progressive taxes show how they work in practice:
Regressive Tax Example
If shoppers pay a 6% sales tax on their groceries whether they earn $30,000 or $130,000 annually, those with lesser incomes end up paying a greater portion of total income than those who earn more. If someone makes $20,000 a year and pays $1,000 in sales taxes on consumer goods, 5% of their annual income goes to sales tax. But if they earn $100,000 a year and pay the same $1,000 in sales taxes, this represents only 1% of their income.
Proportional Tax Example
Under a proportional income-tax system, individual taxpayers pay a set percentage of annual income regardless of how much they earn. The fixed rate doesn't increase or decrease as income rises or falls. An individual who earns $25,000 annually would pay $1,250 at a 5% rate, whereas someone who earns $250,000 each year would pay pays $12,500 at that same rate.
Progressive Tax Example
In the U.S., income taxes operate under a progressive system. In 2023, federal progressive tax rates range from 10% to 37%. For a single taxpayer, the marginal rate of taxation is:
- 37% for incomes over $578,125
- 35% for incomes over $231,250
- 32% for incomes over $182,100
- 24% for incomes over $95,375
- 22% for incomes over $44,725
- 12% for incomes over $11,000
The tax rates are applied progressively from 10% to 37%. A single taxpayer with a taxable income of $50,000 in 2023 does not pay the full 22% rate for their income. Instead, they pay 10% on the first $11,000 of income, 12% on income from $11,001 to $44,724, and 22% for the amount over $44,725. This earner's effective tax rate is 12%.
Are Income Taxes Progressive Taxes?
Income taxes can be both progressive or proportional. Progressive taxes impose low tax rates on low-income earners and higher rates on those with higher incomes, while individuals are charged the same tax rate regardless of how much income they earn.
Is the Federal Income Tax Proportional?
No, the federal income tax in the United States is progressive.
Are Regressive Taxes Fair?
Regressive taxes may seem fair because they are imposed on everyone regardless of income, but they hurt low-income earners more than others. That's because they spend a larger portion of their income on regressive taxes than people who earn more.
What Taxes Are Considered Regressive?
Regressive taxes are those that are paid regardless of income, such as sales taxes, sin taxes, and property taxes.
How Do You Calculate Progressive Tax?
Progressive tax systems don't charge taxpayers a flat rate. Instead, the percentage you owe increases as your income gets higher. In the U.S., the marginal tax rates are set by the IRS. Here's how you would calculate your income tax burden in 2023: If you are filing as a single taxpayer, you pay 10% on the first $11,000 of income, 12% on any earnings between $11,001 and $44,725, 22% up until $95,375, and so on. The thresholds are different for married couples filing jointly. The highest tax rate of 37% only affects income higher than $578,125 (or $693,750 for married couples filing jointly).
The Bottom Line
Paying taxes is inevitable. But how much of an impact they have depends on the tax system used and how much you make. Regressive taxes—sales taxes, property taxes, and sin taxes—and proportional taxes have a greater impact on low earners because they spend more of their income on taxation than other taxpayers. But progressive taxes—the federal tax system used in the United States—usually impact high-income earners more than anyone else.
Correction—Apr. 14, 2023: A previous version of this article failed to include the benefits of preferential tax rates on capital gains that affect the effective tax rates in the United States progressive tax system.
FAQs
progressive tax—A tax that takes a larger percentage of income from high-income groups than from low-income groups. proportional tax—A tax that takes the same percentage of income from all income groups. regressive tax—A tax that takes a larger percentage of income from low-income groups than from high-income groups.
What is an example of a regressive tax? ›
Though true regressive taxes are not used as income taxes, they are used as taxes on tobacco, alcohol, gasoline, jewelry, perfume, and travel. User fees often are considered regressive because they take a larger percentage of income from low-income groups than from high-income groups.
What is an example of proportional tax? ›
The sales tax is an example of a proportional tax because all consumers, regardless of income, pay the same fixed rate. Although individuals are taxed at the same rate, flat taxes can be considered regressive because a larger portion of income is taken from those with lower incomes.
Is the income tax progressive regressive or proportional? ›
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.
What taxes are regressive? ›
A regressive tax is often flat in nature, meaning that the same rate of tax applies (generally) regardless of income. These taxes include most sales taxes, payroll taxes, excise taxes, and property taxes.
What are examples of progressive and regressive taxes? ›
Regressive and progressive taxes impact high- and low-income earners differently, whereas proportional taxes do not. Property taxes are an example of a regressive tax; the U.S. federal income tax is a progressive tax example; and occupational taxes are a type of proportional tax.
Is Social Security tax progressive or regressive? ›
The Social Security tax is a regressive tax, meaning that a larger portion of lower-income earners' total income is withheld, compared with that of higher-income earners.
What is proportional tax in simple words? ›
proportional tax—A tax that takes the same percentage of income from all income groups. regressive tax—A tax that takes a larger percentage of income from low-income groups than from high-income groups.
What is a proportional tax for dummies? ›
What Is a Proportional Tax? A proportional tax is an income tax system that levies the same percentage tax to everyone regardless of income. A proportional tax is the same for low, middle, and high-income taxpayers. Proportional taxes are sometimes referred to as flat taxes.
Who benefits from proportional tax? ›
Examples of a Proportional Tax
Overall, a proportional tax system places a larger financial burden on lower earners. Although technically everyone is paying the same percentage of their taxable income, that rate will have a larger effect on those who are starting with less.
With a progressive tax system, those who earn less are taxed less. Those who earn more are taxed more. Since the top earners are taxed more and on larger sums of money, a progressive tax also increases the amount of tax revenue coming in.
Is Social Security proportional tax? ›
In the United States, everyone pays the same percentage of Social Security tax up to a certain threshold level ($160,200 in 2023). Up to this threshold, the Social Security tax is proportional.
Who is hurt by regressive taxes? ›
As noted above, regressive taxes affect people with low incomes more severely than those with higher incomes because they are applied uniformly to all situations, regardless of the taxpayer.
Are federal taxes regressive? ›
The overall federal tax system is progressive, with total federal tax burdens a larger percentage of income for higher-income households than for lower-income households. Not all taxes within the federal system are equally progressive.
Is federal income a regressive tax? ›
In the U.S., the federal income tax is progressive. There are graduated tax brackets, with rates ranging from 10% to 37%.
What are 3 examples of progressive taxes? ›
Examples of progressive tax include investment income taxes, tax on interest earned, rental earnings, estate tax, and tax credits. The opposite of the progressive system is the regressive tax rate where tax liability reduces as the taxable amount increases.
Why is regressive tax bad? ›
A regressive tax is one that imposes a harsher burden on lower-income households than on households with higher incomes. In lower-income families, a larger proportion of their income pays for shelter, food, and transportation. Any tax decreases their ability to afford these basics.
Are capital gains taxes progressive? ›
Capital gains taxes are progressive, similar to income taxes. Short-term capital gains are taxed according to the relevant federal tax rate. Long-term capital gains are subject to 0%, 15% or 20%, depending on your taxable income. According to the IRS, most people pay no more than 15% on their long-term capital gains.
Is Medicare a regressive tax? ›
Answer and Explanation: a) Medicare is considered a regressive tax.
What age do you stop paying taxes on Social Security? ›
Key Takeaways. Social Security benefits may or may not be taxed after 62, depending in large part on other income earned. Those only receiving Social Security benefits do not have to pay federal income taxes.
As long as you continue to work, even if you are receiving benefits, you will continue to pay Social Security taxes on your earnings. However, we will check your record every year to see whether the additional earnings you had will increase your monthly benefit.
What is another name for a proportional tax? ›
flat tax—Another term for a proportional tax.
How much Social Security tax should be withheld? ›
Social Security is financed through a dedicated payroll tax. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $160,200 (in 2023), while the self-employed pay 12.4 percent. The payroll tax rates are set by law, and for OASI and DI, apply to earnings up to a certain amount.
What tax system does the US have? ›
The overall system of taxation in the United States is progressive. By a progressive tax system, we mean that the percentage of income an individual (or household) pays in taxes tends to increase with increasing income. Not only do those with higher incomes pay more in total taxes, they pay a higher rate of taxes.
What makes a tax progressive? ›
A progressive tax takes a larger percentage of income from high-income groups than from low-income groups and is based on the concept of ability to pay.
Who is responsible for filing a tax return? ›
The U.S. income tax system is built on the idea of voluntary compliance. This means that taxpayers are responsible for declaring all of their income, calculating their tax liability correctly, and filing a tax return on time.
How much is FICA tax? ›
FICA tax is a 15.3% tax that's actually a combination of two taxes: Social Security (12.4%) and Medicare (2.9%). You and your employer split these taxes fifty-fifty, each paying 7.65% of your pretax wages as tax each payday.
What is the best tax system? ›
The Faroes have a tax system that is unique even among their Nordic neighbors, and probably the best in the world. Its operating principles are centralization, efficiency, and simplicity.
Who benefits the most from taxes? ›
Lower Income Households Receive More Benefits as a Share of Total Income. Overall, higher-income households enjoy greater benefits, in dollar terms, from the major income and payroll tax expenditures.
What state has the highest taxes? ›
Highest tax burdens
- New York - 12.47%
- Hawaii - 12.31%
- Maine - 11.14%
- Vermont - 10.28%
- Connecticut - 9.83%
- New Jersey - 9.76%
- Maryland - 9.44%
- Minnesota - 9.41%
The highest-earning Americans pay the most in combined federal, state and local taxes, the Tax Foundation noted. As a group, the top quintile — those earning $130,001 or more annually — paid $3.23 trillion in taxes, compared with $142 billion for the bottom quintile, or those earning less than $25,000.
What is the highest Social Security payment? ›
3 steps to claiming the $4,555 max monthly Social Security...
- Step 1: Work a minimum of 35 years. ...
- Step 2: Earn an income equivalent to or greater than the wage cap. ...
- Step 3: Delay your Social Security claim until age 70.
Yes, Social Security is taxed federally after the age of 70. If you get a Social Security check, it will always be part of your taxable income, regardless of your age. There is some variation at the state level, though, so make sure to check the laws for the state where you live.
How can I lie and get more money on my taxes? ›
How People Can Lie and Get More Money on Taxes
- Not reporting all their income.
- Adding expenses or other deductions that didn't actually occur to reduce the amount of taxable income.
- Claiming dependents who don't exist or aren't theirs.
You would pay an inheritance tax of 11% on $25,000 ($50,000 - $25,000) when it passes to you. Each state is different and taxes can change at the drop of a hat, so it's a good idea to check tax laws in your state, or better yet, talk to a tax pro!
Is Medicare a tax? ›
Taxes under the Federal Insurance Contributions Act (FICA) are composed of the old-age, survivors, and disability insurance taxes, also known as social security taxes, and the hospital insurance tax, also known as Medicare taxes. Different rates apply for these taxes.
Which country has the simplest tax system? ›
By contrast, 95% of taxes are filed online in Estonia, and the process can take as little as three minutes. The rules are simple for individual entrepreneurs and investors based in Estonia, too: individual income is taxed at a flat 20% rate.
Why is flat tax better? ›
Contrary to the claims of some flat tax proponents, flat taxes do not lead to lower taxes across the board. Flat taxes usually bring lower tax bills for high-income households and, because of that, they produce less revenue than graduated taxes during times of rising inequality.
Is regressive tax good? ›
Increases Savings and Investment
Under a regressive tax system, those who earn higher incomes tend to save more, thereby increasing the saving rate of the nation.
Do any states have a regressive tax? ›
Some states, such as California and Vermont as well as the District of Columbia, have very progressive income taxes. Others have only nominally progressive taxes. Very few states, such as Alabama and Pennsylvania, actually have effectively regressive income taxes.
Reduces Burden on Poor
A progressive tax ensures that those earning more pay a higher percentage than those at the bottom of the income spectrum. This allows the government to reduce taxes on the poor, whilst recouping the income from high-income earners.
Are state taxes progressive? ›
California has a progressive income tax system, with nine tax rates ranging from 1% to 12.3%. Income over $1 million is subject to an additional 1% tax surcharge. The 2022 California state standard deduction is $5,202 for single filers and those married filing separately, and $10,404 for all other filing statuses.
What is a real life example of a regressive tax? ›
Though true regressive taxes are not used as income taxes, they are used as taxes on tobacco, alcohol, gasoline, jewelry, perfume, and travel. User fees often are considered regressive because they take a larger percentage of income from low-income groups than from high-income groups.
Do Texans pay more taxes than Californians? ›
Though Texas has no state-level personal income tax, it does levy relatively high consumption and property taxes on residents to make up the difference. Ultimately, it has a higher effective state and local tax rate for a median U.S. household at 12.73% than California's 8.97%, according to a new report from WalletHub.
Which is an example of a regressive tax quizlet? ›
Sales tax would be an example of a regressive tax because people with higher incomes will spend more on things such as food and clothing causing them to pay more in sales tax than someone with a lower income who will spend less on clothing and food.
What is regressive with example? ›
Regressive taxes place more burden on low-income earners. They take a higher percentage of income on the poor than on high-income earners. Taxes on most consumer goods, sales, gas, and Social Security payroll are examples of regressive taxes. Pigouvian and sin taxes are specific types of regressive taxes.
What is a regressive tax and name an example? ›
It is in opposition to a progressive tax, which takes a larger percentage from high-income earners. With a regressive tax, the tax burden decreases as income rises. Some examples of a regressive tax include sales tax, gas tax, and payroll tax.
What is the first example of a regressive tax mentioned? ›
Consequently, the chief examples of specific regressive taxes are those on goods whose consumption society wishes to discourage, such as tobacco, gasoline, and alcohol. These are often called “sin taxes.”
