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Progressive Tax System: Definition, Pros & Cons

Progressive Tax System: Definition, Pros & Cons
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Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Find out what a progressive tax system is and why the system in the United States is considered progressive. Learn about the debate over tax systems and some of the biggest arguments for and against a progressive tax.

What Is a Progressive Tax System?

People can sometimes get emotional or have strong opinions when talking about the amount of money that gets taken out of their paychecks in the form of taxes. The rationale and methods on how governments tax people is a popular debate that has been around for decades. The debate usually includes the pros and cons between progressive, regressive, and proportional (or flat) tax systems. This lesson will focus on the progressive tax system.

A progressive tax is a tax where the tax rate increases as your income increases. The United States currently has a progressive income tax that requires higher income citizens to pay a larger percentage of their income in taxes. Taxpayers are divided into categories based on income levels. A great way to see how a progressive tax system works is to look at the graph on the screen which shows average U.S. tax rates as a percentage of income projected for individuals in 2014.

Average 2014 Projected Tax Rate for Individuals by Income Level - Produced by Tax Policy Center
avg tax rate

When people talk or debate about progressive tax systems, they are usually referring to the income tax that is due on April 15th of every year. It is important to note that progressive tax can come in other forms, such as estate taxes or luxury taxes on goods.

Estate taxes require higher net worth individuals to pay an additional tax on their property when they die. If the value of all the property is over a certain amount, they most likely will be taxed. As of 2014, a person could pay up to 40% in federal estate tax upon death!

A luxury tax can be added to goods such as jewelry, high-end automobiles, or even alcohol or tobacco. All of these taxes can be referred to as progressive in nature because they are more often paid for by people with higher incomes or those that have accumulated more assets or wealth over time. There are several pros and cons to the current progressive tax system. Let's explore a few.

Pros of the Progressive Tax System

Income Equality - This is one of the biggest pros that progressive tax advocates promote. A progressive tax system really acts as a tool for redistributing income from the upper class to the lower and middle class. Those individuals who earn more pay more into the federal government. This helps keeps the income gap from growing wider between the rich and the poor.

Social Justice - Some argue that it is morally right that those who can afford to pay more in taxes should do so. Those that have very little income should be helped out by those who can afford to help. A progressive tax allows governments to collect money from those who can afford to pay, and uses it to help create a society that is more happy as a result. Those taxes are used to fund education, medical services, housing assistance, and other welfare programs for those people who really need help. Because so many people need help with these things, society is better off as a whole.

More Government Revenue - A progressive system allows governments to collect more money from higher income earners. This results in more money collected than if everyone paid the same percentage. As a result, the government can provide more programs and services that benefit society.

Cons of the Progressive Tax System

However, there are also some cons to the progressive tax system.

Discrimination - One of the most common arguments against a progressive tax is that it doesn't truly promote equality among individuals. Someone might ask or say the following: 'How is it fair that I have to pay a higher percentage of my income than the guy across town who makes less money?' 'I certainly don't get to cast more votes even though I provide more money to the federal tax base.' To proponents of this argument, a flat tax ,or tax where everyone pays the same percentage, would be more fair.

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