Aprogressive tax is atax in which thetax rate increases as the taxable amount increases.[1][2][3][4] The termprogressive refers to the way the tax rate progresses from low to high, with the result that a taxpayer'saverage tax rate is less than the person'smarginal tax rate.[5][6] The term can be applied to individual taxes or to a tax system as a whole. Progressive taxes are imposed in an attempt to reduce thetax incidence of people with a lowerability to pay, as such taxes shift the incidence increasingly to those with a higher ability-to-pay. The opposite of a progressive tax is aregressive tax, such as a sales tax, where the poor pay a larger proportion of their income compared to the rich (for example, spending on groceries and food staples varies little against income, so poor pay similar to rich even while latter has much higher income).[4]
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The term is frequently applied in reference to personalincome taxes, in which people with lowerincome pay a lower percentage of that income in tax than do those with higher income. It can also apply to adjustments of the tax base by usingtax exemptions,tax credits, or selective taxation that creates progressive distribution effects. For example, awealth orproperty tax,[7] a sales tax onluxury goods, or the exemption of sales taxes on basic necessities, may be described as having progressive effects as it increases the tax burden of higher income families and reduces it on lower income families.[8][9][10]
Progressive taxation is often suggested as a way to mitigate the societal ills associated with higherincome inequality,[11] as the tax structure reduces inequality;[12] economists disagree on the tax policy's economic and long-term effects.[13][14][15] One study suggests progressive taxation is positively associated with subjective well-being, while overall tax rates and government spending are not.[16]
In the early days of theRoman Republic, public taxes consisted of assessments on owned wealth and property. For Roman citizens, the tax rate under normal circumstances was 1% of property value, and could sometimes climb as high as 3% in situations such as war. These taxes were levied against land, homes and other real estate, slaves, animals, personal items and monetary wealth. By 167 BC, Rome no longer needed to levy a tax against its citizens in the Italian peninsula, due to the riches acquired from conquered provinces. After considerable Roman expansion in the 1st century, Augustus Caesar introduced a wealth tax of about 1% and a flatpoll tax on each adult; this made the tax system less progressive, as it no longer only taxed wealth.[17] In India under theMughal Empire, the Dahsala system was introduced in A.D. 1580 under the reign ofAkbar. This system was introduced by Akbar's finance minister, Raja Todar Mal, who was appointed in A.D. 1573 in Gujarat. The Dahsala system is a land-revenue system (system of taxation) which helped to make the collecting system be organised on the basis of land fertility.
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The first modernincome tax was introduced inGreat Britain byPrime MinisterWilliam Pitt the Younger in his budget of December 1798, to pay for weapons and equipment for theFrench Revolutionary War. Pitt's new graduated (progressive) income tax began at a levy of 2old pence in thepound (1⁄120 or 0.83%) on annual incomes over £60 and increased up to a maximum of 2shillings (10%) on incomes of over £200. Pitt hoped that the new income tax would raise £10 million, but actual receipts for 1799 totalled just over £6 million.[18]
Pitt's progressive income tax was levied from 1799 to 1802 when it was abolished byHenry Addington during thePeace of Amiens. Addington had taken over asprime minister in 1801, after Pitt's resignation overCatholic emancipation. The income tax was reintroduced by Addington in 1803 when hostilities recommenced, but it was again abolished in 1816, one year after theBattle of Waterloo.
The present form of income tax in the United Kingdom was reintroduced by SirRobert Peel in theIncome Tax Act 1842. Peel, as aConservative, had opposed income tax in the1841 general election, but a growing budget deficit required a new source of funds. The new income tax, based on Addington's model, was imposed on incomes above £150. Although this measure was initially intended to be temporary, it soon became a fixture of the British taxation system. A committee was formed in 1851 underJoseph Hume to investigate the matter but failed to reach a clear recommendation. Despite the vociferous objection,William Gladstone,Chancellor of the Exchequer from 1852, kept the progressive income tax, and extended it to cover the costs of theCrimean War. By the 1860s, the progressive tax had become a grudgingly accepted element of the English fiscal system.[19]
In the United States, the first progressive income tax was established by theRevenue Act of 1862. The act was signed into law by PresidentAbraham Lincoln, and replaced theRevenue Act of 1861, which had imposed aflat income tax of 3% on annual incomes above $800. TheSixteenth Amendment to the United States Constitution, adopted in 1913, permitted Congress to levy all income taxes without any apportionment requirement. By the mid-20th century, most countries had implemented some form of progressive income tax.[20]
BothKarl Marx andFriedrich Engels supported a progressive income tax.[21]
The idea ofNegative Income Tax (NIT) was stumbled upon and discussed by various thinkers and is most commonly attributed toMilton Friedman, who made it more prominent in his 1962 work ‘Capitalism and Freedom’. The theory places itself as an alternative to the contemporary progressive tax systems which are deemed too bureaucratic and inefficient, it’s emphasized for its lower administrative costs and unitary system of providing welfare and support without discrediting the beneficiaries. It also eliminates unnecessary processes and institutions by directly providing to the substandard.[22]
NIT is a system where the flow of the tax payment is inverted for salaries falling below a specified threshold; individuals surpassing the given level have to contribute money to the state, while those below are recipients of said funds. Theoretical frameworks of this idea could be referred back toWilliam Petty,Vilferdo Pareto, andPaul Samuelson among others.
The adjustability of subsidies given to the poor households by the system eliminates thewelfare trap issue faced by other proposals (i.e.means-test). The ‘wage subsidy’ is best demonstrated by the gap between ones salary, base pay, and real income post-subsidy. Once the minimal criteria defined by the according government is met, the recipient becomes the payer.
Milton provides five other advantages to NIT. It allows households and families to sustain themselves directly from their income without having to rely on other programs or plans. Secondly, it provides cash to the recipient, which is perceived as the most superior means of support. Thirdly, Milton claims that negative income tax could replace all other supporting programs and work as the universal program on its own. Fourthly, lower administration costs associated with NIT compared to other systems. Lastly, it should not, in theory, interfere with market mechanisms unlike other government interventionist laws (i.e.minimum wage).[23]
A survey conducted in 1995 established that the majority of American economists advocated for the addition of a negative income tax into the welfare system.[24] The United States federal government took a key interest on the matter and between 1968 and 1982 sponsored four experiments across various states to see the effects of NIT on labor supply, income, and substitution effects. As part of the result, most participants reduced their labor supply, especially the youth by as much as four weeks. These responses may seem imminent from a generous system like NIT.[25]
NIT saw extensive use underPresident Nixon'sFamily Assistance Plan in 1969. It was also implemented in 1975 for the working poor through theearned income tax credit.[26] The system is still in power today, but differs from the original theories of Milton and his supporters.
Indices such as theSuits index,[7]Gini coefficient,Kakwani index,Theil index,Atkinson index, andHoover index have been created to measure the progressivity of taxation, using measures derived fromincome distribution andwealth distribution.[27]
The rate of tax can be expressed in two different ways; themarginal rate expressed as the rate on each additional unit of income or expenditure (or last dollar spent) and theeffective (average) rate expressed as the total tax paid divided by total income or expenditure. In most progressive tax systems, both rates will rise as the amount subject to taxation rises, though there may be ranges where the marginal rate will be constant. Usually, the average tax rate of a taxpayer will be lower than the marginal tax rate. In a system withrefundable tax credits, or income-testedwelfare benefits, it is possible for marginal rates to fall as income rises, at lower levels of income.[citation needed]
Theeffective marginal tax rate is a marginal tax rate that includeswelfare benefits along with taxes. It is the percentage of additional income that a taxpayer pays in taxes less any changes in the value of welfare benefits and tax credits received. It
Usually tax progressivity considers only the distribution of the costs of the tax, or thetax incidence. The distribution of costs and benefits of government expenditures may also be analyzed, which together with the tax incidence is thefiscal incidence.
Tax laws might not be accurately indexed toinflation. For example, some tax laws may ignore inflation completely. In a progressive tax system, failure to index the brackets to inflation will eventually result in effective tax increases (if inflation is sustained), as inflation in wages will increase individual income and move individuals into higher tax brackets with higher percentage rates. This phenomenon is known asbracket creep and can causefiscal drag.[citation needed]
There is debate between politicians and economists over the role of tax policy in mitigating or exacerbating wealth inequality[citation needed] and the effects on economic growth.[citation needed]
Progressive taxation has a direct effect on decreasingincome inequality.[12] This is especially true if taxation is used to fundprogressive government spending such astransfer payments andsocial safety nets.[11] However, the effect may be muted if the higher rates cause increasedtax evasion.[12][28] When income inequality is low,aggregate demand will be relatively high, because more people who want ordinaryconsumer goods and services will be able to afford them, while thelabor force will not be as relativelymonopolized by the wealthy.[29][30] High levels of income inequality can have negative effects on long-term economic growth, employment, andclass conflict.[31][32] Progressive taxation is often suggested as a way to mitigate the societal ills associated with higher income inequality.[11] The difference between theGini index for anincome distribution before taxation and the Gini index after taxation is an indicator for the effects of such taxation.[33]
The economistsThomas Piketty andEmmanuel Saez wrote that decreased progressiveness inUS tax policy in the post World War II era has increased income inequality by enabling the wealthy greater access to capital.[13]
According to economistRobert H. Frank, tax cuts for the wealthy are largely spent onpositional goods such as larger houses and more expensive cars. Frank argues that these funds could instead pay for things like improving public education and conducting medical research,[34] and suggests progressive taxation as an instrument for attackingpositional externalities.[35]
A report published by the OECD in 2008 presented empirical research showing a weak negative relationship between the progressivity of personal income taxes and economic growth.[14] Describing the research, William McBride, a staff writer with the conservativeTax Foundation, stated that progressivity of income taxes can undermine investment, risk-taking, entrepreneurship, and productivity because high-income earners tend to do much of the saving, investing, risk-taking, and high-productivity labor.[36][37] In contrast, according to theIMF, some advanced economies could increase progressivity in taxation for tackling inequality, without hampering growth, as long as progressivity is not excessive. The IMF also states that the average top income tax rate for OECD member countries fell from 62 percent in 1981 to 35 percent in 2015, and that in addition, tax systems are less progressive than indicated by the statutory rates, because wealthy individuals have more access to tax relief.[38]
EconomistGary Becker has describededucational attainment as the root ofeconomic mobility.[39] Progressive tax rates, while raising taxes on high income, have the goal and corresponding effect of reducing the burden on low income, improvingincome equality. Educational attainment is often conditional on cost andfamily income, which for the poor, reduces their opportunity for educational attainment, since poor people suffer also from borrowing constraints.[40][41][42] Increases in income for the poor and economic equality reduces theinequality of educational attainment.[43][44] Tax policy can also include progressive features that providetax incentives for education, such astax credits andtax exemptions forscholarships andgrants.[45][46]
A potentially adverse effect of progressive tax schedules is that they may reduce the incentives for educational attainment.[15][41][47] By reducing the after-tax income of highly educated workers, progressive taxes can reduce the incentives for citizens to attain education, thereby lowering the overall level ofhuman capital in an economy.[15][41][47] However, this effect can be mitigated by an educationsubsidy funded by the progressive tax.[48] Theoretically, public support for government spending on higher education increases when taxation is progressive, especially when income distribution is unequal.[49]
Friedrich Hayek viewed the implementation of progressive tax systems as incompatible with the principles of an open andliberal society. He argued that the imposition of higher taxes on higher incomes creates a bias against economic wealth and negatively impacts the incentives of the working age. Histhought stems from philosophical and moral theories. Hayek believed that fiscal problems are partly to its foundations in moral philosophy practiced by society. Progressive tax prohibits the incentives of free market competition, whilst the wealth of the minority is subordinated to the democratic vote of amajority. This results in illegitimate transfers of political power.
Hayek believed the sweeping rise of progressive tax has risen from deceptive justifications which in reality didn't bring fruit. He claims the historical and methodological conditions gave way to the imposition of the system. He believed the system was established from ludicrous premises and failed to attain its redistributive goals. He said the progressive tax failed to benefit the poor, instead the benefit fell to themiddle class who comprised the majority of voters, a majority which may push for tax changes.[50]
Hayek advocated for aflat (orproportional) tax rate.Estonia was one of the first countries in Europe to adapt such a tax system.[51]
Robert Nozick in his famous work'Anarchy, State and Utopia' made the widely known statement: "Taxation of earnings from labor is on a par with forced labor".[52] He acknowledged the difference between the previous forms of slavery, but holds the belief that it is just as immoral regardless. Nozick believed that the government should have limited role in most sectors, including the economy. He advocates for what's known as the 'minimal state', hence the government should not enforce 'redistribution' as it would minimize therewards given by the free market forces. Whatever revenue is generated by taxes is to be spent on basic maintenance (i.e. road repairs).[53]
The current tax code has been criticized by many who believe that the nation's wealthiest are not paying their share. This is because the current tax system charges the individual based onwages and notinvestment income, an area where theupper-class make most of their money. Prominent investorWarren Buffett has been a strong voice in support of taxing the rich proportional to investment income as well as wages. Buffett famously pointed out that if you analyzed every employee in his office including himself, he is quoted saying, "I'll probably be the lowest paying taxpayer in the office."[54] This support ultimately led to the proposal of "The Buffett Rule" byPresident Barack Obama which proposed a 30% minimum tax on people making more than $1 million a year.[55] The aim of the Buffett Rule was to ensure that investment income would constitute as a taxable income instead of simply wages. Ultimately, the rule was rejected by congress in March 2012.President Joe Biden attempted to do whatPresident Obama could not and introduced the "Paying a Fair Share Act" which followed the Buffett's Rule philosophy. As of August 2023, the bill has not picked up steam in congress. Those that take advantage of these tax codes in the United States include some of the most wealthy and prominent. It is said that "Bezos reportedly paid no federal income taxes at all in 2007 and 2011, whileMusk paid none in 2018."[56]
A 2011 study psychologistsShigehiro Oishi, Ulrich Schimmack, andEd Diener, using data from 54 countries, found that progressive taxation was positively associated with the subjective well-being, while overall tax rates and government spending were not. The authors added, "We found that the association between more-progressive taxation and higher levels of subjective well-being was mediated by citizens' satisfaction withpublic goods, such as education and public transportation."[16] Tax law professorThomas D. Griffith, summarizing research on human happiness, has argued that because inequality in a society significantly reduces happiness, a progressive tax structure which redistributes income would increase welfare and happiness in a society.[57] Since progressive taxationreduces the income of high earners and is often used as a method to fund governmentsocial programs for low income earners, calls for increasing tax progressivity have sometimes been labeled asenvy orclass warfare,[clarification needed][35][58][59] while others may describe such actions as fair or a form ofsocial justice.[59][60]
Even with studies that conclude that a progressive tax can be positively associated with the increased well-being of certain individuals, experts point out that many wealthy democracies are often hesitant to enforce progressive taxes. A study conducted by Yale political scientistKenneth Scheve andDavid Stasavage of New York University published in theComparative Political Studies journal helps explains why that is. Their research findings concluded that voters hold the belief that all citizens should be treated equally with regards to taxation regardless of the income that they bring in. The authors point to this reasoning as one of the main reasons certain countries refuse to raise taxes on the wealthier despite rising inequality.Kenneth Scheve is quoted saying, “Progressive taxation is a powerful policy tool for responding to rising inequality, but we found that wealthy democracies don’t resort to it very often.” The study results result from studies conducted in the United Kingdom, United States, and Germany. Contrary to a progressive tax, some voters argue that a fair tax system should take into account whether individuals earned their wealth through hard work compared to others. This perspective emphasizes equal-treatment fairness norms, which suggest that all citizens should be treated equally in areas such as voting rights and legal protections. Accordingly, these voters believe that everyone should pay the same tax rate, mirroring the concept of equal treatment. While progressive tax policies may address income inequality in certain countries, there is a significant segment of the population that opposes them based on this notion of political equality. This opposition may hinder the formation of a consensus to address inequality by raising taxes on higher incomes and wealth.[61]
There are two common ways of computing a progressive tax, corresponding topoint–slope form andslope–intercept form of the equation for the applicable bracket. These compute the tax either as the tax on the bottom amount of the bracketplus the tax on the marginal amountwithin the bracket; or the tax on the entire amount (at the marginal rate),minus the amount that this overstates tax on the bottom end of the bracket.
For example, suppose there are tax brackets of 10%, 20%, and 30%, where the 10% rate applies to income from$1 to 10,000; the 20% rate applies to income from$10,001 to 20,000; and the 30% rate applies to all income above$20,000. In that case the tax on$20,000 of income (computed by adding up tax in each bracket) is. The tax on $25,000 of income could then be computed two ways. Using point–slope form (tax on bottom amount plus tax on marginal amount) yields:Geometrically, the line for tax on the top bracket passes through the point and has a slope of 0.3 (30%).
Alternatively, 30% tax on $20,000 yields, which overstates tax on the bottom end of the top bracket by, so using slope–intercept form yields:Geometrically, the line for tax on the top bracket intercepts they-axis at −$3,000 – it passes through the point – and has a slope of 0.3 (30%).
In the United States, the first form was used through 2003, for example (for the 2003 15% Single bracket):[62]
From 2004, this changed to the second form, for example (for the 2004 28% Single bracket):[63]
Most systems around the world contain progressive aspects. When taxable income falls within a particulartax bracket, the individual pays the listed percentage of taxon each dollar that falls within that monetary range. For example, a person in the U.S. who earned$10,000 US oftaxable income (income after adjustments, deductions, and exemptions) would be liable for 10% of each dollar earned from the 1st dollar to the 7,550th dollar, and then for 15% of each dollar earned from the 7,551st dollar to the 10,000th dollar, for a total of$1,122.50.
In theUnited States, there are seven income tax brackets ranging from 10% to 39.6% above an untaxed level of income based on thepersonal exemption and usually various other tax exemptions, such as theEarned Income Tax Credit and home mortgage payments. The federal tax rates for individual taxpayers in theUnited States for the tax year 2021 are as follows: 10% from$0 to$9,950; 12% from$9,950 to$40,525; 22% from$40,525 to$86,375; 24% from$86,375 to$164,925; 32% from$164,925 to$209,425; 35% from$209,425 to$523,600; and 37% from$523,600 and over.[65] The US federal tax system also includes deductions for state and local taxes for lower income households which mitigates what are sometimes regressive taxes, particularlyproperty taxes. Higher income households are subject to thealternative minimum tax that limits deductions and sets a flat tax rate of 26% to 28% with the higher rate commencing at$175,000 in income. There are also deduction phaseouts starting at$112,500 for single filers. The net effect is increased progressivity that completely limits deductions for state and local taxes and certain other credits for individuals earning more than$306,300.[66] In order to counteract regressive state and local taxes, many US states implement progressive income taxes.[67] 32 states and the District of Columbia have graduated-rate income taxes.[68] The brackets differ acrossstates.
There has been a hefty decline in progressivity of the United States federal tax system since the 1960s. The two periods with the largest tax progressivity reductions occurred underthe Reagan administration in the 1980s andthe Bush administration in the 2000s.[69] TheTax Cuts and Jobs Act of 2017 implemented byPresident Trump greatly affected the United States tax system. The act took steps to dramatically lower taxes for high-income households, open deduction loopholes for businesses, and cut thefederal corporate tax rate down to 21 percent.[70] It maintained the structure of seven tax brackets for personal income but lowered five of the seven by one percent or more.[71] For example, after theTax Cuts and Jobs Act of 2017 was implemented, in 2017, a married couple with a total income of $250,000 after deductions would have faced a tax rate of 33%. However, by 2023 and 2024, their highest tax rate would have decreased to 24%. This change would have resulted in a notable disparity in their take-home pay compared to previous years.[72]
Albania transitioned from a flat tax to a progressive tax in 2014.[73] Kraja, Lirëza and Morelli[73] have concluded that while a progressive tax framework may be more effective in achieving policy objectives like reducing income inequality and boosting government tax revenue, policymakers must carefully weigh its impact on investment and entrepreneurship and implement strong tax administration and enforcement measures to combat tax evasion within a progressive tax framework.
Belgium has the following personal income tax rates (for the income year 2021): 25% fromEUR€0 to €13,540; 40% from €13,540 to €23,900; 45% from €23,900 to €41,360; and 50% from €41,360 and any amount over.[74]
Canada has the following federal tax rates on income (for the year 2021): 15% fromC$0 to$49,020; 20.5% from$49,020 to$98,040; 26% from$98,040 to$151,978; 29% from$151,978 to$216,511; and 33% on income over$216,511.[75]
Denmark has the following state tax rates regarding personal income: 12.11% for the bottom tax base; 15% for the top tax base, or income exceedingDKK 544,800. Additional taxes, such as the municipal tax (which has a country average of 24.971%), the labour market tax, and the church tax, are also applied to individual's income.[76]
Germany has the following personal income tax rates for a single taxpayer (for the 2020 tax year): 0% up toEUR€9,744; 14-42% from €9,744 to €57,918; 42% from €57,918 to €274,612; and 45% for €274,612 and any amount over.[77]
Indonesia has implemented progressive vehicular taxes at the municipal level inCimahi andPalembang,[78][79] which had a significant impact of the progressive tax system on the local income of the municipality.
Norway has the following personal income tax rates (for the year 2020): 1.9% fromNOK180,800 to NOK254,500; 4.2% from NOK254,500 to NOK639,750; 13.2% from NOK639,750 to NOK999,550; and 16.2% from NOK999,550 and above.[80]
Sweden has the following state income tax brackets for natural persons: 0% on income up toSEK 413,200; 20% from SEK 413,200 to SEK 591,600; and 25% from SEK 591,600 and any amount over.[81]
TheUnited Kingdom has the following income tax rates: 0% from£0 to £12,570; 20% from £12,571 to £50,270; 40% from £50,271 to £150,000; and 45% from £150,000 and over.[82] In Scotland, however, there are more tax brackets than in other UK countries.Scotland has the following additional income tax brackets: 19% from £12,571 to £14,667; 20% from £14,667 to £25,296; 21% from £25,297 to £43,662; 41% from £43,663 to £150,000; and 46% for any amount over £150,000.[83]
New Zealand has the following income tax brackets: 10.5% up toNZ$14,000; 17.5% fromNZ$14,001 toNZ$48,000; 30% fromNZ$48,001 toNZ$70,000; 33% fromNZ$70,001 toNZ$180,000; 39% for any amount overNZ$180,000; and 45% when the employee does not complete a declaration form.[84] All values are in New Zealand dollars and exclude the earner levy.
Australia has the following progressive income tax rates (for the 2024-2025 financial year): 0% effective up toA$18,200; 16% fromA$18,201 toA$45,000; 30% fromA$45,001 toA$135,000; 37% fromA$135,001 toA$190,000; and 45% for any amount overA$190,000.[85]
Italy also follows a progressive tax blueprint. As of October 2020, the progressive tax rates in Italy are outlined as follows. Income between 0 and €15,000 – 23%, €15,000 – €28,000 – 25%, €28,000 – €50,000 – 35%, €50,000 and over – 43%.[86]
Contrasting models:
(6). Increasing in rate as the taxable amount increases
progressive tax, graduated tax (any tax in which the rate increases as the amount subject to taxation increases)
The luxury tax is a progressive tax – it takes more from the wealthy than from the poor.
{{cite web}}: CS1 maint: bot: original URL status unknown (link)Excise levy on goods or services considered to be luxuries rather than necessities. Modern examples are taxes on jewelry and perfume. Luxury taxes may be levied with the intent of taxing the rich ...
{{cite web}}: CS1 maint: multiple names: authors list (link)we found that family income and wealth have positive and statistically significant links to attainment: children who grow up in families with higher income and greater wealth receive more schooling.
students from low income backgrounds are more sensitive to changes in tuition and aid packages than their colleagues from higher income families, as are students attending community colleges compared to universities.
[Implications of increased economic inequality:] Average achievement goes up slightly, but so does the variability of achievement. Average years of schooling increase by less than 1 percent. Inequality, in contrast, increases substantially, by over 8 percent when all four measures of inequality are considered together. Moreover, a higher proportion of students do not complete high school or 11th grade.
income inequality effectively reduces school enrollment, mainly at secondary level.
Under conditions of high income inequality and tax progressivity, there will be even greater support for higher education spending even if most people do not receive it
{{cite journal}}: CS1 maint: DOI inactive as of July 2025 (link){{cite journal}}: CS1 maint: numeric names: authors list (link)
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