Vertical equity follows from the laddering of income tax to progressively higher rates. The laddering of income taxes conforms to the underlying definition of vertical equity, as those who have a greater ability to pay tax, pay a higher proportion of their income. The U.S. progressive income tax involves seven tax brackets, each with its own rate. The brackets didn’t change from 2024 to 2025 but the ranges of income covered by the brackets increased to reflect inflation.

• A regressive tax is a type of tax that decreases based on someone’s income.
• Tax is nothing but a mandatory contribution, levied by the government, without reference to any benefit to the taxpayer, in return for the tax paid by him.
• 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.
• If, for example, a particular tax credit (reduction in tax) falls by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points higher than indicated by the statutory rates.

Progressive vs. Regressive Taxes: Who Pays More?

The loss is conceptually defined as a loss of surplus and the loss of surplus is characterized as deadweight loss. Taxes can be evaluated based on an average impact or a marginal impact and can be categorized as progressive, regressive, or proportional. Proportional taxes are when everyone pays the same tax rate, regardless of income. A regressive tax is a type of tax that decreases based on someone’s income.

FAQs on Difference Between Progressive and Regressive Tax

This means that individuals with lower incomes pay a higher percentage of their income in taxes compared to those with higher incomes. In a progressive tax system, the marginal tax rate (the tax rate applied to the next additional dollar of income) increases with higher income levels. The average tax rate (the total tax paid as a percentage of total income) is generally lower than the marginal tax rate due to tax brackets. A regressive tax is a tax system in which the tax rate decreases as the taxable income or wealth of individuals or entities increases. The tax burden is higher for lower-income individuals, resulting in a higher percentage of income being paid in taxes for lower-income groups.

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When considering tax policy, it is important to weigh the impact on different income groups, the effect on economic growth, and the political considerations involved. Ultimately, the choice between progressive and regressive tax will depend on the goals and values of a particular society. While income taxes fall under the progressive arrangement, sales taxes are regressive. The former is imposed as per the tax brackets in which individuals fall, while the latter remains the same for all when buying the same products with the same sales tax.

Effect on Economic Growth

An individual who earns $25,000 annually would pay $1,250 in tax at a 5% rate. Someone who earns $250,000 each year would pay $12,500 at that same 5% rate. Other examples along the same lines are excise taxes on airfare or gasoline and property taxes. Federal progressive tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37% as of 2019. The first tax rate of 10% applies to incomes of $9,700 or less for single individuals, and $19,400 for married couples filing joint tax returns.

This arrangement removes the economic barrier caused due to the wide gap between the income ranges. Moreover, with a different progressive tax rate, the amount payable as tax is distributed among the citizens, indicating the economy’s elasticity. As a result, the highly paid individuals carry the heaviest tax loads and vice-versa. This difficulty of determining who bears the tax burden depends crucially on whether a national or a subnational (that is, provincial or state) tax is being considered.

The purpose of a progressive tax system is to increase the tax burden to those most able to pay. However, some policy makers believe that progressive taxation is an overall inefficiency within the tax structure. These individuals and groups support a flat tax or proportional tax instead.

Understanding regressive, proportional and progressive taxes

On the other hand, regressive taxes, which take a larger percentage of income from lower earners, are often criticized for exacerbating economic disparities. However, they are sometimes favored for their simplicity and potential to encourage investment and economic growth. Regressive tax systems have a significant impact on different income groups, affecting each in unique ways. While the intent of taxation is to generate revenue for government spending, the structure of a tax system can have profound implications on economic equality and financial stability of the populace. Regressive taxes, by definition, take a larger percentage of income from low-income earners than from high-income earners. This is in stark contrast to progressive taxes, which aim to tax higher incomes at higher rates.

On the other hand, regressive tax is sometimes preferred by those who believe in a smaller role for government and lower taxes overall. They argue that regressive tax can be simpler and more efficient, as it places less of a burden on higher-income individuals. 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.

• Single filers who earn more than $626,350 annually must pay 37% on every dollar of income earned over $626,350.
• On the other hand, for Stella, who earns $500, the sales tax becomes 1.4% of her income.
• In summary, progressive and regressive taxes represent different approaches to taxation, reflecting the distributional impact of taxes on different income levels.
• Progressive taxes are popular because they shift the burden of paying taxes to those who are likely most able to pay.

Only estates valued at $11.4 million or more are liable for federal estate taxes as of 2019, although many states have lower thresholds. Individuals and corporations could seek ways to avoid or evade taxes, undermining the effectiveness of the tax system and reducing government revenue. When two people with different incomes decide to stay in the same locality, they pay tax to the government for owning. This tax amount is the same for both of them and is independent of the individual’s income.

Further, it is based on the notion that individuals who earn more, have to pay more. The major difference between regressive and progressive taxes is who pays more. Social Security is also considered to be a proportional tax because everyone pays the same rate up to the wage base. A single taxpayer with taxable income of $25,000 would owe $970 on the first $9,700 and 12% or $1,836 on the balance, for a total of $2,806. Some other examples of proportional taxes include per capita taxes, gross receipts taxes, and occupational taxes.

Regressive vs. Proportional vs. Progressive Taxes: An Overview

In summary, progressive and regressive taxes represent different approaches to taxation, reflecting the distributional impact of taxes on different income levels. Progressive taxes increase tax rates as income or wealth increases, aiming to achieve greater income equality and a larger tax burden on higher-income individuals or entities. Regressive taxes, in contrast, have a flat or decreasing tax rate structure, potentially placing a relatively higher tax burden on lower-income individuals or entities. Understanding the differences between these tax systems helps inform discussions on tax fairness, income redistribution, and the overall impact of taxation on different income groups. Progressive taxation stands as a cornerstone in the architecture of modern tax systems, aiming to distribute the burden of taxes more equitably across the economic spectrum. This approach to taxation is predicated on the principle that individuals and entities should contribute to government revenues in a manner that is commensurate with their ability to pay.

Shoppers pay a 6% sales tax on their groceries whether they earn $30,000 or $130,000 annually, so those with lesser incomes end up paying a greater portion of total income than those who earn more. If someone makes $20,000 a year and pays $1,000 in sales taxes consumer goods, 5% of his annual income goes to sales tax. But if he earns $100,000 a year and pays the same $1,000 in sales taxes, this represents only 1% of his income. Many low-income Americans pay no federal income tax at all because of these deductions. As many as 44% of U.S. citizens did not pay income taxes in 2018 because their earnings weren’t sufficient to reach the lowest tax rate. Part of what makes the U.S. federal income tax progressive is the standard deduction that lets individuals avoid paying taxes on the first portion of income they earn each year.

Higher-income individuals or entities contribute a larger share of their income to taxes, helping to fund public services and redistribute wealth. Progressive tax systems have a graduated tax rate progressive taxation vs regressive taxation structure, where the tax rate increases as income or wealth increases. This means that individuals or entities with higher incomes pay a higher percentage of their income in taxes. Progressive tax and regressive tax are two different approaches to taxation, each with its own advantages and disadvantages. Progressive tax is often seen as a way to promote income equality and fund social programs, while regressive tax can place a heavier burden on lower-income individuals.

Income tax statutes commonly contain graduated marginal rates—i.e., rates that rise as income rises. Careful analysis of marginal tax rates must consider provisions other than the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) falls by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points higher than indicated by the statutory rates. Since marginal rates indicate how after-tax income changes in response to changes in before-tax income, they are the relevant ones for appraising incentive effects of taxation. A basic economic theorem holds that the marginal effective tax rate in income from capital is zero under a consumption-based tax.