What is a Progressive Tax System?

A progressive tax system is a tax system under which people pay more in taxes the more they earn. Progressive taxes may also be based upon expenditures, depending on how the tax system is structured. Almost every country uses a progressive tax system to collect taxes from its citizens, with the income tax systems used by many nations being a classic example of such a system. The opposite of progressive taxes is regressive taxes, in which tax liability decreases as people earn more money. In a proportional system, on the other hand, the tax rate remains fixed regardless of income.

The organization of a progressive tax system can vary considerably. One common way to organize the system is to break income into “brackets.” Depending on the bracket one occupies, the tax rate will vary. For people below the poverty line, taxes are greatly reduced or waived. As people start to earn more money, they are taxed at a higher percentage, under the argument that they can meet their basic needs, and therefore have more disposable income, which means that they can bear a higher tax burden. The highest tax bracket varies, depending on the nation, with some countries taxing people in high brackets at very high rates.

Some people argue that a progressive tax system should be based on expenditures, rather than income, because expenditures can create a more accurate picture of how much income is “disposable.” Two people in the same income tax bracket who live in areas with radically different costs of living, for example, might have differing amounts of disposable income. A tax rate which seems reasonable in an area with a low cost of living might be too high to bear in an area with a high cost of living. Basing taxation on expenditures also creates an opening to tax luxury goods and services at a different rate.

There are a number of arguments in defense of a progressive tax system, and a range of reasons to use such a system. Many of these arguments revolve around the idea that taxes can be used as a social equalizer to limit the gap between rich and poor while also ensuring that money and power do not become concentrated in the hands of a few. Other people argue that such systems are unfair because wealthier individuals pay more, especially after government agencies eliminate tax loopholes which are commonly used to reduce tax liability.