Definition: A progressive tax system refers to one in which an individual’s tax rate rises in proportion to his income.
What is a progressive tax?
High-income people pay a greater tax rate than low-income ones under a progressive tax system. With this tax structure, we think that people with a lot of money can afford to pay more of it on taxes, whilst others with little money need more to survive.
The income tax in the United States is progressive. Other taxes, such as the real estate tax, are progressive, whereas others, such as the sales tax, are regressive.
A regressive tax is one that requires low-income people to pay a larger percentage of their income in taxes.
Assume Jack’s annual salary is $60,000.00. His boss offers him a raise, and he will now make $100,000 per year. Because of his promotion, Jack’s income is now in a higher tax band, which means he will pay a higher tax rate on his earnings. The government concluded that because Dan’s income was higher, he should be allowed to pay a higher proportion of his income in taxes.
The progressive income tax rate
In the United States, the progressive income tax rate is dependent on an individual’s income. The tax rate for 2022 (due in the spring of 2023) ranges from 10% to 37%, depending on income:
10% on income from $0 to $10,275
12% on income from $10,276 to $41,775
22% on income from $41,776 to $89,075
24% on income from $89,076 to $170,050
32% on income from $170,051 to $215,950
35% on income from $215,951 to $539,900
37% on an income of $539,901 and above
Marginal tax rates are used in the United States, which implies that each income tax rate applies only to a percentage of your income. For example, everyone pays 10% tax on the first $10,275 of their income. Those earning between $10,276 and $41,775 pay a 12% marginal tax rate, but only on this amount of income. This method serves to guarantee that a rise in income has no unintended consequences for taxpayers and that no one pays more than their fair share of taxes.
In the United States, marginal tax rates are calculated using your adjusted gross income rather than your actual income. Your adjusted gross income takes certain deductions into account, which might help you minimize your taxable income.
There are also several tax deductions available in the United States that can assist individuals in lowering their taxable income and moving into a lower tax band. The standard deduction will be increased to $13,850 in 2023, up from $12,950 in 2022. Other itemized deductions are available to certain individuals, such as those who have paid student loan interest, donated to charity, or contributed to an IRA. (IRA).
Pros VS. Cons of a progressive tax system
Proponents of a progressive income tax system point out that the greater someone’s income, the more income tax they may deduct. Someone who earns six figures has a greater flexibility in their budget than someone who lives below the poverty line and barely makes ends meet.
The progressive income tax not only enables low-income individuals to keep the majority of their earnings, but it also funds several programs that assist low-income people financially.
Medicaid is one of these programs, and it offers health insurance to low-income people. Some think that this helps to cut overall costs by allowing those with limited means to get preventative treatment. Otherwise, individuals might face larger medical expenditures while delaying seeking medical assistance until they require an emergency room visit. Another example is the earned income tax credit, which gives low-income people a tax break.
Proponents of a progressive income tax also contend that savings for low-income persons have a higher economic impact than saves for high-income ones. The explanation for this effect is that low-income people prefer to spend their whole annual income, which stimulates the economy. High-income folks, on the other hand, preserve the majority of their money rather than consuming it all.
People with high earnings, in particular, do not use many of the social security services that their tax deductions help pay for, so progressive taxation is seen as a kind of unjust income transfer. Critics also say that a progressive tax system restricts hard work and achievement by requiring people to pay a higher tax rate as their income rises.
Countries with a progressive tax system
The United States and many Western nations have progressive income tax systems, which require individuals with higher incomes to pay a higher proportion of their earnings in taxes.
Canada’s income tax system is progressive, with five separate tax brackets ranging from 15% to 33%. Any income of $50,197 (CAD) or less is subject to the lowest tax rate of 15%. Any income of $221,708 (CAD) or more is subject to the maximum tax rate of 33%. Tax rates in Canada are comparable to those in the United States.
Mexico has a progressive income tax system as well. Those earning less than 7,735.00 (MXN) pay only 1.92% income tax on their earnings. The highest income tax rate in the country is 35%, although it only applies to income over $3,898,140.12 (MXN).
The United Kingdom
The income tax rate in the United Kingdom ranges from 0% to 45%. Individuals with an annual income of £12,570 or less are exempt from paying income tax. The highest possible tax rate of 45% applies to earnings in excess of £150,000.
Individuals in Germany pay income tax in four progressive tax brackets ranging from 0% to 45%. Those earning less than 9,984 euros do not have to pay income tax. Those earning more than 277,826 euros pay 45% of their greatest income.