OVERVIEW Show Progressive, regressive, and flat taxes are all different tax systems governments can deploy. Learn what each of these types of taxation means for you. The taxes you pay on your income and purchases can take several forms, including progressive tax, regressive tax, and flat taxes. But what is a progressive tax? And how does it compare to a regressive or flat tax? What is a progressive tax?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%. For the 2021 tax year (tax returns filed in 2022), those tax brackets are:
In 2021, if you’re single and have $15,000 of taxable income, you’re in the 12% tax bracket, while if you’re single and have taxable income of $600,000, you’re in the 37% tax bracket. But this doesn't mean that all your income is taxed at that rate, as there's a difference between a marginal tax rate and an effective tax rate. If you have $15,000 of taxable income, you have a 12% marginal tax rate, but your effective tax rate is lower. That's because when your income enters a higher tax bracket, only the income that falls into that higher bracket is taxed at the higher rate. In 2021, you would calculate your tax bill as follows:
Your total tax bill comes to $1,601. While there are a few ways to calculate effective tax rate, the simplest way is to divide you total tax by your taxable income. TurboTax calculates effective tax rate in a more sophisticated way by adjusting for various recaptured taxes and tax credits.
Progressive tax pros and consProgressive taxes are popular because they shift the burden of paying taxes to those who are likely most able to pay. Like federal income tax, progressive tax systems typically allow several deductions and credits. These tax breaks provide additional relief for low-income taxpayers, as is the case with the Earned Income Tax Credit. They can also encourage certain behaviors. For example, the mortgage interest deduction encourages homeownership, and the American Opportunity Tax Credit encourages people to pursue higher education. But some tax breaks can also make it possible for high-income taxpayers to pay less tax than lower-income people. For example, preferential rates on long-term capital gains sometimes result in wealthy taxpayers paying a lower rate overall than their middle-class counterparts. Inflation can also cause "bracket creep." This is when taxpayers are pushed into a higher tax bracket, even though their higher income doesn't give them more buying power. What is a regressive tax?A regressive tax is the opposite of a progressive tax because you pay a higher tax rate as your income decreases. There are two types of regressive taxes. Proportional taxProportional 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.
Flat taxFlat taxes are when everyone pays the same amount, regardless of income. Flat taxes are typically a flat rate rather than a flat dollar amount. Some states add a flat excise tax to car registrations. For example, say Myra and Darnell are both registering their cars, and the state adds a flat fee of $100 to every car registration. That $100 flat tax makes up 5% of Darnell's monthly income but only 2% of Myra's monthly income. Pros and cons of tax structuresFlat taxes are appealing because they're simple: You pay a flat rate, and your tax calculations are done. But as illustrated in the examples above, regressive taxes place more of the tax burden on people with lower incomes — many of whom currently pay little or no income tax at all. For that reason, most "flat tax" proposals are a modified proportional tax. While the details vary from plan to plan, these proposals often:
For most of us, paying taxes is inevitable. But the impact they have depends on the tax system used and your income. Remember, with TurboTax, we'll ask you simple questions about your life and help you fill out all the right tax forms. With TurboTax you can be confident your taxes are done right, from simple to complex tax returns, no matter what your situation.
Answer simple questions about your life and TurboTax Free Edition will take care of the rest. For simple tax returns only
A progressive tax is a type of tax that takes a larger percentage of income from taxpayers as their income rises. An example is the federal income tax, where there are six marginal tax brackets ranging from 10% (lowest-income taxpayers) to 39.6% (highest-income taxpayers). Most state income taxes have a similar progressive structure. A regressive tax is the exact opposite. Higher-income taxpayers pay a smaller percentage of their income than lower-income taxpayers because the tax is not based on ability to pay. An example is state sales tax, where everyone pays the same tax rate regardless of their income. We’re collecting feedback on FAQs. Please complete this quick survey to help with our continual improvements.
In simple terms, a progressive tax is a tax where the amount of tax paid as a proportion of income increases as income increases. A regressive tax is the opposite, where the amount of tax paid as a proportion of income decreases as income increases. Figure 1: Progressive, proportional and regressive taxes  Source: Author’s Calculations The most common example of a progressive tax is the personal income tax. As a person’s income increases, they enter into higher tax brackets. This means that they pay a higher tax rate on any additional income earned. As a result, the average tax rate increases as people earn more income. The following chart shows the marginal and average tax rates for the Australian income tax for 2014-15. Figure 2: Marginal Versus Average Tax Rates in the Australian Income Tax System Source: Author’s calculations (excluding the temporary budget repair levy and the Medicare levy) While the income tax is progressive, many of Australia’s taxes are regressive. The GST is slightly regressive (with respect to income) as wealthier people spend less of their income on average than poorer people. So called ‘sin taxes’, such as the taxes placed on gambling, alcohol and tobacco tend to disproportionately affect those on low incomes. Many government charges, such as motor vehicle registration, are highly regressive. Are progressive taxes better than regressive taxes?All other things being equal, progressivity within a tax system is generally regarded as a desirable characteristic. However, it is usually quite difficult to determine whether any individual tax being progressive is a good or a bad thing. One issue is that redistribution is only one goal of the tax system, and any outcome must be compared with other goals, including efficiency and simplicity. Another issue is that it is important to look at the progressivity of the tax system as a whole, and as a result it is dangerous to look at a single tax in isolation. For instance, it is often claimed that increasing the GST would make the tax system more regressive. This would be true if the GST was raised and the revenue used to fund a reduction in the income tax. However, an increase in the GST used to fund increased family payments would make the tax and transfer system more progressive. Measurement of progressivity – the devil in the detail.There isn’t a single measure of progressivity. In fact, there are a variety of options that need to be considered in order to estimate how progressive or regressive a tax is. The following section considers the four main decisions that need to be made in this process. The first decision is to determine the economic incidence (as opposed to the legal incidence) of the tax. This process determines who bears the burden of the tax system. In general, it is difficult to determine exactly who bears the burden of a tax, as taxes placed on producers may be passed on to consumers, either in part or in full. In practice, simplifying rules of thumb are often used, such as assuming that all GST is borne by the final consumer, and all income and payroll tax is borne by the employee. The second decision is to determine the appropriate unit base for comparison. This is generally done at either a household level or an individual level. This choice has important implications when looking at the impact of the tax and transfer system, as the tax system is largely based around the individual, while the transfer system is largely based around the household. Changes that decrease the tax paid by low income individuals will by definition be progressive when using individuals as the base, but if those low income individuals are the second or third earner in a wealthy household, then the same policy may increase regressivity when measured using the household as a base. The third decision is to determine which definition of income is to be used. This could be the yearly income, or if the data is available, may look at income over a longer time period in order to smooth over short term fluctuations in income. Where an analysis is looking at data at the household level, it is also common to make an adjustment for the number of people residing in a household (as a family of 6 living on $100000 a year is less ‘well off’ than a family of 2 with the same income). An example of this is the ABS measure of Equivalised household income. Finally, in some cases, data on expenditure is used rather than income, which can be justified as a proxy for lifetime income, or a measure of ability to pay in its own right. In many cases, the choice of individual or household as the base for comparison, and the choice of income definition will only make a minor change to the results. However, particular care needs to be taken when:
Where the results are sensitive to the assumptions used, it is common to provide the results under both sets of assumptions. The final decision is to decide how to aggregate the results obtained in the analysis. In most cases, taxes won’t be strictly increasing or decreasing in income, and even in those cases, it is still of interest to know whether one tax is more progressive/regressive than another. One solution to this problem is to simply graph the results and allow readers to interpret them as they wish. This approach was taken in the following example looking at superannuation tax concessions, taken from page 56 of the TTPI stocktake report. Figure 3: Proportion of superannuation tax concession received, by income decile Source: The Murray Financial Systems Inquiry Another approach is to use a summary measure, such as the change in the Gini coefficient, resulting from a policy. As a result of simplifying the information about the policy into a single number, such an approach must necessarily lose some information about the policy impact. However, the approach can be useful if it is important to express the results as a single number, such as if you wanted to compare the progressivity of tax systems in different countries. Further ResearchHow should progressivity be measured? By the Tax Policy Centre Who Pays? A report on the progressivity of taxation in the 50 US States by the Institute on Taxation and Economic Policy Measurement of Progressivity, from the Treasury document: International Comparison of Australia’s Taxes Tackling income inequality – The role of taxes and transfers. From the OECD Journal Economic Studies What nation has the most progressive tax system, by Greg Mankiw ABS Household Expenditure Survey The Distributional Impact of State Taxes for South Australian Households, by Ben Phillips A distributional analysis of the 2015-16 Federal Budget, By Ben Phillips Tags: equity — incidence — progressive — redistribution — regressive — tax |
What is the difference between a progressive tax and a regressive tax give an example of each part 2 a progressive tax is a tax for which people with lower incomes pay a?
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