What Are Progressive Taxes and How Do They Work?
There’s been a lot in the news lately about taxes, and the term “progressive tax” has been heard a lot. But what are progressive taxes, and how do they work? Here’s what you need to know.
Read: 3 Ways Smart People Save Money When Filing Their Taxes
What Is a Progressive Tax?
A progressive tax is one in which the tax rate increases as the amount that is taxed increases. Many income taxes, including the federal income tax in the United States, are progressive taxes. Those Americans that have higher incomes pay a higher percentage of their income in federal income taxes.
The idea behind a progressive income tax is that people who earn more should pay more. People who earn less need to pay a higher percentage of their income for basic necessities like rent and food, so they pay less in taxes. Those with higher earnings have more money left over after they pay for essentials, so they are taxed at a higher rate.
Example of a Progressive Tax
The federal income tax in the United States is a progressive tax. There are six tax brackets, and the one you fall into depends on your income.
Here are the tax brackets for 2023 for a single filer.
- 10% — income of $11,000 or less
- 12% — income over $11,000
- 22% — income over $44,725
- 24% — income over $95,375
- 32% — income over $182,100
- 35% — income over $231,250
- 37% — income over $578,125
For a married couple filing jointly, the brackets are:
- 10% — income of $22,000 or less
- 12% — income over $22,000
- 22% — income over $89,450
- 24% — income over $190,750
- 32% — income over $364,200
- 35% — income over $462,500
- 37% — income over $693,750
Good To Know
It’s important to understand that these are marginal tax rates, which means that they are the amount that each additional dollar above the threshold is taxed.
In other words, if you’re a single taxpayer earning $600,000, you would be in the highest tax bracket at 37%. But not all of your income is taxed at 37%.
- The first $11,000 is taxed at 10%.
- The next $33,725 is taxed at 12%.
- The next $50,650 is taxed at 22%.
- The next $86,725 is taxed at 24%.
- The next $49,150 is taxed at 32%.
- The next $346,875 is taxed at 35%.
- The last $21,875 is taxed at 37%.
Note that if the same single taxpayer had earned $578,130, they would still be in the 37% tax bracket, but just $5 of their income would be taxed at 37% because only $5 exceeds the threshold of the 37% tax bracket.
Federal income tax brackets can change from year to year. The 2023 brackets were updated from 2022 to reflect rising inflation.
Advantages of a Progressive Tax
The advantage of a progressive tax is that higher earners pay a larger share of federally funded programs and services than lower earners. Those with higher incomes have more money left after paying for the things they need, so they shoulder more of the burden for programs that benefit everyone.
Disadvantages of a Progressive Tax
Those who oppose progressive taxes say they create a disincentive to work hard and earn more money. The argument is that people will not want to improve their situation by earning more money if it means they will have to pay more in taxes. But no matter how high your income is, your tax rate will never be 100%, so earning more will always put more money in your pocket, even if you move into a higher tax bracket because of it.
Other Kinds of Taxes
Not all taxes are progressive. There are also regressive taxes, which subject everyone to the same rate of tax, regardless of their resources. These are sometimes called “flat taxes.”
Many states have flat, or regressive, income taxes. Massachusetts, for example, has a state income tax of 5%. No matter what your income is in Massachusetts, you pay 5% of it to the state. So, someone earning $20,000 a year pays $1,000 in Massachusetts state income tax, and someone earning $200,000 a year pays $10,000. While the higher earner pays more money in state income tax, it is likely to be a bigger burden to the lower earner.
Sales tax is also a regressive tax. When two people purchase a $200 item in a state with a 5% sales tax, they will each pay $10 in sales tax, regardless of how much income they earn.
Final Take
An understanding of the different types of taxes and the various tax brackets will help you know how much you can expect to pay in taxes and can help you plan accordingly come tax time.
FAQ
Here are the answers to some of the most frequently asked questions about progressive taxes.- What are progressive and regressive taxes?
- Progressive tax is where the tax rate increases based on income level. A higher income level means a higher tax rate will be applied.
- Regressive tax is where the same rate of tax applies to everyone, regardless of income.
- What is a progressive tax and how does it work?
- The progressive tax rate increases based on income level. A higher income level will mean you are in a higher tax rate bracket. Those will lower incomes will be taxed at a lower rate.
- What is the meaning of proportionate tax?
- Proportionate tax is a flat tax, where the same fixed rate of tax will apply to everyone, regardless of income.
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