A progressive tax is a type of income tax system that is set up so people with a higher disposable income must pay a larger percentage of their income in taxes than those with low to moderate earning power. Historically, progressive taxation has been supported by economists and political scientists ranging from Karl Marx to Adam Smith. However, the concept is not without its opponents. Libertarians, as well as some conservatives, believe that progressive taxation is a negative policy because it tends to lower the overall savings rate, encourage people to move to countries with tax policies that are more favorable to the wealthy, and discourage people from working to earn higher incomes because they will be forced to pay more taxes.
Overall, the tax system in the United States is classified as using progressive taxes. There are six tax brackets ranging from 10% to 35%, but the percentage of tax a person owes is only calculated based on each dollar that falls within a particular monetary range. Under this system, the top 10% of tax payers are responsible for generating almost two-thirds of all income tax revenue. However, the tax system in the United States has been criticized as unfair because tax cuts made in 2001 and 2003 essentially rewarded wealthy investors by reducing the tax burden on earnings made from investment income.
Since a progressive tax system tends to appeal to the average person’s sense of fairness, it should come as no surprise that most countries throughout the world use some form of progressive taxation. In China, the tax brackets under the progressive tax system range from 5% for the poorest citizens to 45% for the country’s elite. In Japan, progressive taxes range from 5% to 40%. In Australia, tax brackets range from 0% to 45%. In New Zealand, citizens must pay between 19.5% and 49% of their income in taxes. In the United Kingdom, progressive taxes range from 20% to 40% of a person’s taxable income.
Regressive taxes are the opposite of progressive taxes. Although a regressive tax appears to be a flat tax at first glance, this system is set up so that people with lower incomes are paying a higher percentage of their earnings in taxes. Sales taxes in the United States are one example of a regressive tax, since poorer individuals are forced to pay a higher percentage of their income in taxes for clothing, transportation, and other daily essentials.