From our May-June 2013 edition of Fiscal Focus. The 2013 legislative session was dominated by discussion about the progressivity of Minnesota's tax system. In this From the Director column, we argue that new revenues will have to include more regressive forms of taxation.
According to the international Organization for Economic Co-operation and Development (OECD), the United States has the 4th highest income inequality among all developed countries – superseded only by Turkey, Chile, and Portugal. Yet, also according to the OECD, the United States has the most progressive tax system, far exceeding the wealthier, highly egalitarian social democracies of northern Europe.1 How is this reconciled?
The answer is that in most countries, progressivity and income equality gains are achieved through government programs, not the tax code. According to the author of the OECD study, the United States is the only OECD country which reduces inequality more through the direct tax system rather than through transfer spending. Or as described in the Washington Post, “America’s taxes are the most progressive in the world. Its government is among the least.”
In most of the world equality gains come through progressive income support, child care, education, health, and related spending programs. But crucially all this is financed by far more regressive tax systems than we have in the United States. These countries learned that to support strong redistributionist policies, they needed tax systems that could collect a lot of tax revenue without harming economic growth. Among other features, regressive, broad-based consumption taxes are especially important. The value added tax - a revenue staple in most of the world – fits that bill.
What does any of this have to do with Minnesota? We have just emerged from a session where a lot of progressive policy cuisine was made from distinctly American tax ingredients. “Tax the rich,” “tax fairness,” and “more progressivity” were the only words on the recipe card. Any tax proposal affecting the middle class was revenue non grata.
The end of session demonstrated that under these tight philosophical and political constraints, securing enough revenue to support progressive policy ambitions isn’t easy. For example, the tax conference committee briefly noodled on whether the world of excise and gross receipts taxes on alcohol could be manipulated to build progressivity into the taxation of alcohol consumption. Is it possible to protect the average Minnesotan’s six-pack while sticking it to the Wine Spectator crowd? (Alas, it isn’t, but not for lack of trying.)
In the end taxes on high income earners, estate taxes, and corporate income taxes – regressive, but having the considerable benefit of appearing to tax the wealthy – did most of the heavy lifting. Highly regressive tobacco taxes were also essential, but proponents argued these taxes were only meant to induce people to stop smoking. $400 million was simply the price society had to be willing to pay – rather, make that receive – to support good public policy.
The call for new revenue may not be over. Many in Minnesota’s progressive community may not be completely satisfied with the results of the 2013 session. When first introduced, Gov. Dayton’s budget featuring $2 billion in new taxes was described only as “a good start.”2 Concerns have already been expressed about addressing the treatment some health and human services programs received this session.
Funding future program ambitions will remain no less of a challenge than they were this session. For both practical and political reasons, progressivity advocates will have to embrace more regressive forms of taxation going forward.
Practically, we have now essentially spent all our “fairness ammunition” with respect to taxing income, especially if one gives any credence at all to the competitiveness principle of taxation. Minnesota can now claim the second highest income tax rate in the nation at the 4th tier threshold of $250,000 for married joint filers – second only to Oregon, a state without a sales tax. Plus we continue to have one of the highest corporate income tax rates in the nation but now stripped of some provisions which may have helped make the tax palatable enough to locate here. What little comparative headroom we may have had in the past with respect to taxing income has now evaporated.
Politically, further pursuit of even more progressive taxation in Minnesota may do significant damage to progressives’ own agenda. Author and scholar Monica Prasad of Northwestern University has built a distinguished academic career around investigating the sociology of taxation. In exploring why decreases in social spending took root in some countries but not others, she has concluded tax codes and tax progressivity have a major effect. Countries with stronger progressive tax codes and more punitive business taxation triggered much stronger and more aggressive conservative responses against social welfare policies and related spending. The net effect in these countries is that progressive agendas actually lost ground over time. In short: the progressivity of tax codes is negatively correlated with the amount of redistribution they do. The less progressive the tax code, the more overall progressive the fiscal system.
Selling the average Minnesotan on the idea that regressive taxes are needed to support important social outcomes is a lot more difficult than selling the idea “some people aren’t paying their fair share.” But sooner rather than later, Minnesota’s progressives will have to recognize that to achieve their vision for Minnesota, some regressive forms of taxation will need to be considered an ally, not an enemy.
Footnotes
- 1 Growing Unequal? Income Distribution and Poverty in OECD Countries, OECD, 2008
- 2 "A legislative session to rebuild the middle class", Duluth News Tribune, 2/23/2013
FAQs
Critics of progressive taxes consider them to be a disincentive to success. They also oppose the system as a means of income redistribution, which they believe punishes the wealthy, upper class, and even the middle class, unfairly.
What was the strongest argument in favor of progressive taxation? ›
Economic efficiency. The argument is that progressive taxation increases worker productivity, yielding greater economic efficiency and higher aggregate incomes.
How do you solve progressive tax? ›
Complete the progressive tax chart below. To find the amount of tax, use this formula: income x percent of income paid in tax = amount of tax. Example: $25,000 x . 15 (15%) = $3,750.
Is the progressive tax system fair? ›
Both of these systems may be considered "fair" in the sense that they are consistent and apply a rational approach to taxation. They differ, however, in their treatment of wealth, and each system may be called "unfair" according to who benefits or is treated differently.
What are the pros and cons of the progressive tax system? ›
Advantages and disadvantages of progressive tax
The taxes they pay have a greater impact on their standard of living than they do on high-income taxpayers, most of whom can easily afford to pay for the basics. However, critics of progressive tax systems believe they act as a disincentive to hard work and success.
Why are progressive taxes more fair? ›
Some forms of taxes are considered progressive. Progressive taxes take more from those able to pay more. Because this method is based on the ability to pay, it is considered the fairest means of taxation. People with higher incomes pay larger amounts of tax because their taxable income is larger.
What is considered one of the disadvantages of progressive taxation? ›
The cons are that a progressive tax discriminates against people making more money, can lead to class warfare, penalizes those that work harder, and can lead to individuals hiding income or assets.
What are 3 pros of progressive tax? ›
Progressive income taxation may result in a more equitable income distribution, higher revenues, less financial and economic volatility, and faster growth.
Who is impacted more by progressive taxes? ›
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.
What is a good example of a progressive tax? ›
A progressive tax system might, for example, tax low-income taxpayers at 10 percent, middle-income taxpayers at 15 percent and high-income taxpayers at 30 percent. The U.S. federal income tax is based on the progressive tax system.
A tax system that is progressive applies higher tax rates to higher levels of income. For the U.S. the individual income tax has rates that range from 10 percent to 37 percent. This design leads to higher-income individuals paying a larger share of income taxes than lower-income individuals.
What if everyone paid the same tax rate? ›
Proportional taxes are when everyone pays the same tax rate, regardless of income. Sales taxes are typically regressive proportional taxes because everyone pays the same rate, regardless of income. For example, say Darnell and Myra buy the same TV for $1,000 and each pay 7% in sales tax, which amounts to $70.
Who pays highest tax in world? ›
Countries with the Highest Income Tax Rates
- Ivory Coast: 60% Ivory Coast has one of the highest income tax rates in the world, with the top bracket taxed at 60%. ...
- Finland: 56% ...
- Japan, Austria, and Denmark: 55% ...
- Sweden and Aruba: 52% ...
- Belgium, Israel, and Slovenia: 50% ...
- Netherlands: 49% ...
- Portugal and Ireland: 48% ...
- Spain: 47%
The majority of federal taxes goes toward public programs as well as national defense. The major categories include Social Security, the army, medical aid, income security, and the health of citizens.
What country has the most progressive tax system? ›
News To Obama: The OECD Says the United States Has the Most Progressive Tax System | Tax Foundation.
Is Social Security tax a progressive tax? ›
The taxation of benefits is broadly progressive, since people with low incomes (about half of all beneficiaries) pay nothing and the tax rate on benefits increases with income. As an earned benefit, Social Security should be subject to tax, like other earned benefits, such as employer pensions.
What is one advantage of a progressive tax? ›
Progressive income taxation may result in a more equitable income distribution, higher revenues, less financial and economic volatility, and faster growth.
Can a raise cause you to owe taxes? ›
Yes, getting a raise affects taxes. The more money you earn, the more taxes you will have to pay, increasing your tax bill. For example, if the income tax is 10% and you earn $5,000, your tax bill is $500. If you get a raise to $8,000, your tax bill is now $800.
What tax system is the best? ›
Tax Competitiveness Index 2022: Estonia has the world's best tax system
- It has no corporate income tax on reinvested and retained profits (and a 14-20 per cent corporate income tax rate on distributed profits). ...
- It has a flat 20 per cent tax on individual income.
The major difference between regressive and progressive taxes is who pays more. For a regressive tax, low-income earners pay more than middle- and high-income earners. For a progressive tax, higher income earners pay more than their lower income peers.
There are seven federal income tax rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
Which statement about progressive taxes is true? ›
Which statement about progressive taxes is true? The rate increases as income increases. Which tax is an indirect tax?
Which statement accurately describes a progressive tax system? ›
Answer and Explanation: A progressive tax goes up as the amount subject to tax goes up.
What are 3 advantages of a flat tax? ›
Advantages of a flat tax
For example, a flat tax system is much simpler than a progressive one, making it possible for all individuals to fill out their own tax forms. A flat tax also would eliminate virtually all compliance costs (e.g., monies paid to professional tax preparers) and reduce red tape significantly.
What are 5 examples of progressive tax? ›
Examples of progressive tax include investment income taxes, tax on interest earned, rental earnings, estate tax, and tax credits.
What is different about progressive tax? ›
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 are 3 countries that use a progressive tax? ›
Countries With the Highest Income Tax for Single People
- Germany. Germany has a progressive tax, which means that higher-income individuals pay more taxes than lower-income individuals. ...
- Belgium. Belgium's top progressive tax rate is 50%. ...
- Lithuania. ...
- Denmark. ...
- Slovenia.
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.
What kind of tax system does the United States use? ›
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 is the progressive tax reform? ›
It is a bedrock principle of fairness that those with higher incomes should pay progressively higher tax rates. Any tax reform must ensure that each fifth of the income distribution (as well as the top 1% and top 0.1%) should have a higher average effective tax rate than the income group below.
The income tax is an example of progressive tax.
What is a progressive tax and give at least one example? ›
For example, a wealth or property tax, a sales tax on luxury goods, or the exemption of sales taxes on basic necessities, may be described as having progressive effects as it increases the tax burden of higher income families and reduces it on lower income families.
What is progressive tax and common examples? ›
Mark has an annual income of $50,000; Sally has an annual income of $80,000; Rachel has an annual income of $100,000. Mark will pay 5% in income taxes; Sally will pay 15% in income taxes; Rachel will pay 20% in income taxes. Since the tax rate increases as their incomes increase, then it is a progressive tax system.
Which states have no income taxes at all? ›
Tax-free states
- Alaska.
- Florida.
- Nevada.
- South Dakota.
- Texas.
- Washington.
- Wyoming.
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.
Do the poor pay more taxes than the rich? ›
Federal taxes are progressive, but state and local taxes are regressive. According to the Institute on Taxation and Economic Policy, state and local tax rates are highest for the poor and lowest for the rich.
Do we pay more taxes than the rich? ›
According to a 2021 White House study, the wealthiest 400 billionaire families in the US paid an average federal individual tax rate of just 8.2 percent. For comparison, the average American taxpayer in the same year paid 13 percent.
Who pays the least taxes in the world? ›
Among the countries with the lowest tax rates in the world are Malta, Cyprus, Andorra, Montenegro and Singapore. Aside from zero income tax, in Antigua and Barbuda, individuals are also free from paying taxes on wealth, capital gains, and inheritance.
Are taxes higher in Canada or USA? ›
American federal income tax brackets ideally range from 10% to 35%, whereas in Canada it ranges from 15% to 29%.
Which country has no property tax? ›
Countries With No Property Tax: Monaco
Monaco is yet another tax haven based on its tax policies, and it does not levy taxes on individual income, capital gains, as well as net wealth.
In total, about 59.9 percent of U.S. households paid income tax in 2022. The remaining 40.1 percent of households paid no individual income tax.
Why are Americans taxed on everything? ›
Taxes are mandatory payments made by people and businesses that help fund government services at the federal, state and local level. Tax revenue pays for things like Social Security and Medicare, education, national defense, infrastructure and other goods and services intended to benefit the community.
Why do the rich pay less taxes? ›
In contrast to the lower 99% who earn most of their income from wages and salaries, the top 1% earn most of their income from investments. From work, they may receive deferred compensation, stock or stock options, and other benefits that aren't taxable right away.
Is a progressive tax system fair? ›
Progressive income taxes allow states to collect revenue in a way that is both fair and sustainable. Not only do such taxes not harm economic growth, but the vital public investments that they make possible actually pave the way for better state economies.
What is the highest tax rate in the US? ›
There are seven tax brackets for most ordinary income for the 2022 tax year: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.
How do taxes in the US compared to other countries? ›
The average combined US tax rate compared to other countries is not high, staying at the level of 25.81%. Then, there's an equivalent to the personal income tax in the US, which is levied on a federal, state and, in some cases, local level, making up the bulk of respective budgets.
Who is against progressive tax? ›
Those who oppose a progressive tax hierarchy are likely to be those who pay more taxes when such a policy is in place. A progressive tax policy requires individuals with higher incomes and wealth to pay taxes at a rate that is higher than those with lower incomes.
What are the disadvantages of proportional taxes? ›
Proportional taxes can negatively impact government revenue because they need to consider the ability of different income groups to pay taxes. This can lead to reduced government services and investments in areas such as education, healthcare, and infrastructure.
What is the idea behind a progressive tax quizlet? ›
A progressive tax takes a larger share of income from high-income groups than from low-income groups, which "gives" lower-income workers more money by letting them keep more of what they earn.
Which group is negatively affected by progressive taxes? ›
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.
A progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden.
What is an example of a progressive tax? ›
A progressive tax system might, for example, tax low-income taxpayers at 10 percent, middle-income taxpayers at 15 percent and high-income taxpayers at 30 percent. The U.S. federal income tax is based on the progressive tax system.
Who is hurt by 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.
Who benefits from proportional tax? ›
A proportional tax allows people to be taxed at the same percentage of their annual income. Supporters of a proportional tax system propose that it gives taxpayers incentive to earn more because they are not penalized with a higher tax bracket. Also, flat tax systems make filing easier.
Is Social Security tax proportional? ›
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.
How does progressive tax work? ›
A progressive tax is when the tax rate you pay increases as your income rises. In the U.S., the federal income tax is progressive. There are graduated tax brackets, with rates ranging from 10% to 37%.
Why is the government taking taxes from us every paycheck? ›
The federal government levies payroll taxes on wages and self-employment income and uses the revenue to fund Social Security, Medicare, unemployment insurance, and other social insurance programs.
What statement about progressive taxes is true? ›
Which statement about progressive taxes is true? The rate increases as income increases. Which tax is an indirect tax?
