What Is a Progressive Tax? Advantages and Disadvantages

The U.S. https://www.bookstime.com/ income tax involves tax brackets, each with its own tax rate. For tax years 2022 and 2023, those tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. While the tax rates didn’t change from 2022 to 2023, the range of income covered by each bracket increased to reflect inflation. Progressive taxes exist so that the burden of paying for government services, oversight, and infrastructure doesn’t fall disproportionately on those earning lower incomes. Since the top earners are taxed more and on larger sums of money, a progressive tax also increases the amount of tax revenue coming in. In contrast, vertical equity states that people with a higher ability to pay should be paying more in taxes. In other words, the more someone makes in income, the more they should pay in taxes.

This incentive is integral to a regressive tax system, given how the burden is shifted away from higher-income people. The example above encapsulates the main disadvantage of a progressive tax system.

Progressive Tax System

But according to Brookings economists Barry Bosworth and Gary Burtless, the reductions in marginal tax rates did cause a modest increase in labor supply of a magnitude that had been predicted in 1980 by mainstream economists. They conclude that tax policy was probably not the dominant factor influencing labor supply over the decade. One reason for their cautious conclusion about the role of tax cuts is that lower-income men increased their labor supply by a large amount even though their marginal tax rates were constant or even rising until 1987. The results of this study are an important reference for lawmakers seeking to understand the inequitable tax structures they have inherited from their predecessors or helped enact themselves. States may ignore these lessons and continue to demand that their poorest citizens pay the highest effective tax rates. Or, they may decide instead to ask wealthier families to pay tax rates more commensurate with their incomes.

We should treat all capital gains and qualified dividends as ordinary income, an approach President Reagan once signed into law. Which items are included or excluded from the sales tax base is another important factor affecting sales tax fairness. For example, taxing food is a particularly regressive policy because poor families spend most of their income on groceries and other necessities. Of the states that rely the heaviest on consumption taxes, Arkansas and Tennessee both tax food and Hawaii taxes food at the full rate but with a partially offsetting credit for taxpayers making less than $50,000.

Advantages of a Progressive Tax System

However, in the 2018 budget speech, the finance minister retroactively reduced the 30% tax rule to end by Jan 2019 for all beneficiaries if over 5 years, irrespective of an earlier approval for a later end date . However, there are consequences for possible future unemployment aid, tax deduction for a mortgage, pension contributions, and other benefits.

So if you fall into the 22progressive tax bracket, a $1,000 deduction could save you $220. To take another example, taxes paid by high-income people who take advantage of the federal tax exemption for interest on state and local government bonds understate their true burden. The reason is that the yield on these securities is already lower to reflect their tax-preferred status—7.25 percent for tax-exempts in mid-1991 compared to 9.10 percent for taxable bonds . The main beneficiaries of this tax exemption are not those who hold the securities, but the state and local governments that get to pay lower interest rates on the funds they borrow. Because interest from state and local government bonds was tax exempt before 1986 and still is, the tax burden for the well-to-do who hold these bonds was, and is, understated. Judged by the top income tax rates alone, tax progressivity in the United States declined markedly in the eighties. The Economic Recovery Tax Act of 1981 reduced that rate to 50 percent, and the Tax Reform Act of 1986 further reduced it to 33 percent.