Progressive Tax: Definition, Structure & Example

Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, you'll learn about progressive tax. We'll discuss an example of a progressive tax, income tax. Then we'll explore who collects income tax and the purpose for imposing the tax.

What Is A Progressive Tax?

Jane just started her first-ever job at a coffee shop, and she's excited to pick up her first paycheck. She worked 40 hours, and her hourly rate is $8 per hour. By multiplying those numbers, she calculates that her first check should be $320, which is the most money she's every made in her life.

Jane drives to work to pick up her paycheck. But when she opens it, she finds that it's only $280. She runs to her boss and tells him, 'This can't be right, my check is supposed to be $320'. He tells her that $40 was deducted for taxes and to review the deductions on her paystub to see what taxes were taken out. Jane looks on her check and sees an income tax deduction for $40.

After some internet research, Jane learns that income tax is percentage of her income based on how much she makes. It's also called a progressive tax because it's based on her ability to pay. For the rest of this lesson, we'll explore progressive tax, learn why income tax is a progressive tax and discuss the uses of progressive taxes.

Income Tax is a Progressive Tax

A progressive tax is a tax based on one's ability to pay. Therefore, a higher net worth individual would pay more in taxes than a lower income person. Some people's incomes are so low, that they are not responsible for income tax at all.

Income tax is a progressive tax because it's deducted from your paycheck, based on your ability to pay. When you start a new job, you voluntarily elect how much income tax should be deducted from your paycheck. Your employer takes this amount from your paycheck and sends it to the Internal Revenue Service (IRS).

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