Regressive vs. Proportional vs. Progressive Taxes: What’s the Difference?

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Regressive vs. Proportional vs. Progressive Taxes: What’s the Difference?

Regressive, Proportional and Progressive Taxes: An Overview

Tax systems in the United States are classified into three types: regressive, proportional, and progressive. Two of these schemes have differing effects on high- and low-income earners. Lower-income people are hit more by regressive taxation than the rich.

Proportional taxation, commonly known as flat taxation, impacts low-, middle-, and high-income earners fairly equally. Regardless of income, they all pay the same tax rate. A progressive tax has a greater financial effect on higher-income people than on lower-income people.

Key Takeaways

  • A regressive tax system imposes the same percentage on items or commodities bought regardless of the buyer’s income and is regarded to be disproportionately burdensome on low-income individuals.
  • A proportionate tax imposes the same tax rate to everyone, regardless of income.
  • A progressive tax levies a larger percentage of taxes on increasing income levels, based on the premise that higher-income people can afford to pay more.

Regressive Taxes

Under a regressive tax system, low-income persons pay more taxes than high-income ones. This is because the government levies tax as a proportion of the value of the item purchased or owned by a taxpayer. This form of tax has no link to a person’s wages or income level.

Property taxes, sales taxes on items, and excise taxes on consumables such as fuel or flight are examples of regressive taxes. Excise taxes are fixed and are included into the cost of the product or service.

Sin taxes, a kind of excise tax, are levied on goods or activities that are deemed to be unhealthy or harmful to society, such as cigarettes, gambling, and alcohol. They are imposed in order to discourage people from acquiring certain things. Critics of sin taxes contend that they disproportionately harm the poor.

Many people believe that Social Security is a regressive levy. Social Security tax liabilities are restricted at a specific amount of income known as a salary base—$142,800 in 2021 and $147,000 in 2022. Earnings over this threshold are not subject to the 6.2% Social Security tax.

In 2022, the yearly maximum you may pay in Social Security tax is set at $9,114.00, regardless of whether you earn $147,001 or $1 million. Employers must pay an extra 6.2% on behalf of their employees, while self-employed persons must pay the full salary base.

Because it is a fixed rate for everyone and there is a limit, higher-income workers effectively pay a lesser percentage of their entire earnings into the Social Security system than lower-income employees.

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Social Security is both a regressive and a proportionate tax since everyone pays the same rate, at least up to the salary base.

Proportional Taxes

In a proportionate or flat tax system, everyone pays the same tax rate regardless of income or wealth. The goal of this system is to achieve parity between marginal tax rates and average tax rates paid. As of January 2022, nine states employ this income tax system: Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah.

Proportional taxes also include per capita taxes, gross revenue taxes, and occupational taxes.

Proponents of proportional taxes argue that they boost the economy by encouraging individuals to work harder since there is no tax penalty for earning more money. They also think that a flat tax structure would encourage firms to spend and invest more, bringing more money into the economy.

Progressive Taxes

The taxable amount of an individual’s income is used to calculate taxes under a progressive system. They progress at a faster rate, so high-income people pay more than low-income earners. As an individual’s wealth grows, so does his or her tax obligation. Overall, higher-income earners pay a larger proportion of taxes and more money in taxes than lower-income ones.

This kind of system is designed to disproportionately impact higher-income persons over lower- and middle-income workers, reflecting the assumption that they can afford to pay more.

The federal income tax in the United States is a progressive tax system. Its marginal tax rate schedule applies a higher income tax rate to those with higher earnings and a lower income tax rate to those with lower incomes. The percentage rate rises in steps as taxable income rises. Each dollar earned puts the person in a tax bracket or category, resulting in a higher tax rate after the dollar amount reaches a new level.

The standard deduction, which allows people to avoid paying taxes on the first portion of their income each year, is part of what makes the federal income tax in the United States progressive. The standard deduction amount varies from year to year in order to keep up with inflation. Taxpayers may choose to itemize deductions instead if doing so results in a larger total deduction. Because of tax deductions, many low-income Americans pay no federal income tax at all.

Estate taxes are another example of a progressive tax since they primarily impact high-net-worth people (HNWIs) and grow with estate size. Only estates worth $12.06 million or more will be subject to federal estate taxes in 2022, however several jurisdictions have lower limits.

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Progressive tax rates, like every government program, have detractors. Some argue that progressive taxation is a form of inequality and a transfer of wealth since higher-income people pay more to a country that supports more lower-income earners. Those who reject progressive taxation often appeal to a flat tax rate as the best option.

43.8%

According to the Tax Policy Center, the percentage of US people who did not pay income taxes in 2019 because their wages were insufficient to qualify for the lowest tax rate.

Examples of Regressive, Proportional, and Progressive Taxes

The examples of regressive, proportional, and progressive taxes below demonstrate how they function in practice:

Regressive Tax

If buyers pay a 6% sales tax on their groceries whether they make $30,000 or $130,000 per year, people with lower incomes wind up paying a larger percentage of their overall income than those with higher incomes. If a person earns $20,000 per year and pays $1,000 in sales taxes on consumer products, sales tax consumes 5% of their yearly income. However, if they make $100,000 per year and pay the same $1,000 in sales taxes, this amounts to barely 1% of their total income.

Proportional Tax

Individual taxpayers pay a fixed percentage of their yearly income under a proportional income-tax system, regardless of how much they earn. The fixed rate does not change when income grows or decreases. A person earning $25,000 per year would pay $1,250 at a 5% rate, but someone earning $250,000 per year would pay $12,500 at the same rate.

Progressive Tax

Income taxes in the United States are levied in a progressive manner. Federal progressive tax rates in 2022 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The initial tax rate of 10% applies to earnings of less than $10,275 for singles and $20,550 for married couples filing jointly. Incomes over $539,900 for single taxpayers and $647,850 for joint married filers are subject to the maximum tax rate of 37%.

A single taxpayer with taxable income of $50,000 in 2022, for example, would not be subject to the third rate of 22%. Instead, they would owe 10% on the first $10,275 in earnings, 12% on earnings between $10,276 and $41,775, and 22% on earnings beyond $41,776. This taxpayer would owe a total of $6,617 since the 10% rate on the first $10,275 is $1,027, the 12% rate on the $10,276 to $41,775 is $3,780, and the 22% rate on all earnings between 41,775 and 50,000 is $1,809. This results in an effective tax rate of 13%.

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Are Income Taxes Progressive Taxes?

Income taxes may be progressive or proportional in nature. Individuals are paid the same tax rate regardless of their income level, while progressive taxes impose low tax rates on low-income earners and higher rates on those with higher incomes.

Is the Federal Income Tax Proportional?

No, the United States’ federal income tax is progressive.

Are Regressive Taxes Fair?

Regressive taxes seem to be fair since they are levied on everyone regardless of income, yet they disproportionately affect low-income taxpayers. This is because they pay a higher proportion of their income in regressive taxes than those with higher incomes.

What Taxes Are Considered Regressive?

Regressive taxes, such as sales taxes, sin taxes, and property taxes, are levied regardless of income.

How Do You Calculate Progressive Tax?

Taxpayers are not charged a flat rate under progressive tax regimes. Instead, the proportion you owe rises as your income rises. The IRS determines the marginal tax rates in the United States. Here’s how you’d figure out your income tax bill in 2022: If you file as a single taxpayer, you pay 10% on the first $10,275 of income, 12% on earnings between $10,275 and $41,775, 22% on earnings between $41,775 and $89,075, and so on. The criteria for married couples filing jointly range. Only income over $539,900 (or $647,850 for married couples filing jointly) is subject to the maximum tax rate of 37%.

The Bottom Line

Taxation is unavoidable. However, the extent to which they have an influence is determined on the tax system in use and the amount you earn. Regressive taxes—sales taxes, property taxes, and sin taxes—as well as proportional taxes have a bigger effect on low-income taxpayers since they pay a higher percentage of their income in taxes than other taxpayers. However, progressive taxation (the federal tax system employed in the United States) disproportionately affect high-income people.

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