A progressive tax is a tax that imposes a high rate on the wealthy than on the poor. It is the opposite of a regressive tax and is based on the income or wealth of the taxpayer.
The tax takes a significant percentage from the high-income group than it does from low-income individuals. Progressive tax helps low-income families pay for basics like transportation, shelter, and food.
They can spend a large share of the income on the cost of living expenses. Progressive tax does not do much damage to the wealthy because even after the tax, they can manage to afford the basics. The tax might decrease their ability to invest in stocks or purchase luxury goods.
- It impasses a greater tax on the high-income brackets and includes estate taxes, ACA taxes, earned income tax credits, and income tax. The U.S. has a progressive tax and the rates get higher as income increases.
- A progressive tax is a form of income redistribution as the government spends some of the tax money on the services for the poor. It improves the ability of the poor to purchase daily essentials and also increases economic demand.
- Tax breaks for the rich have a weaker effect. The purpose of a progressive tax is to stimulate the economy and to ensure that every individual has a minimum standard of living. It also reduces health care costs in the long run.
Pros of Progressive taxation
The implementation of a progressive tax will reduce the burden on people who cannot afford to pay them. It will leave more money in the pocket of the poor and low wage earners who are likely to spend all the money. They do not have adequate savings and are only in a position to buy daily essentials, which, stimulates the economy.
A progressive tax system has the ability to collect more taxes than regressive taxes. This is because the tax rates are indexed to increase with a rise in income. With progressive taxation, it can become possible to fund a greater portion of the services all people rely on, including transportation, roads, and snow removal. Currently, there are tax brackets based on the filing status and income of individuals. These tax rates range from 10 percent to 37 percent.
The implementation of progressive taxation makes it possible for households to contribute to the growth of the economy in an equal manner. The contributions could be minimal but the process of paying taxes can create a personalized investment in citizenship. The revenue can be generated through the taxes charged on individuals falling in the upper tax bracket.
It helps generate equality through patriotism. The government receives more income than it would otherwise receive. It is possible because the burden of the tax falls on those who have the maximum money. Since wealthy households are paying a high percentage, there will be fewer budget deficits.
Cons of Progressive taxation
Not everyone is happy with progressive taxes. Many consider them to be discriminatory against high income and wealthy individuals. They believe that taxes are only a means of income redistribution. They believe that the tax is based on the myth that the funds can be used for social welfare programs. But in reality, only a small part of government spending goes towards welfare payments.
The current system of brackets used in the US incentivizes specific purchases. When taxable income level is reduced, incentives are created to avoid paying taxes in the bracket of the annual income generated. The cost of progressive taxation in the US is about $20 billion a year. After considering all the compliance costs and corporate costs, it could be more than $200 billion a year. If there is a shift away from the tax system, the cost savings can do good for the economy and can help low-income earners in different ways.
The current system of taxation in the US leads to inequality. About 47% of the population does not pay any taxes and if local and state taxes are included, many upper-class families that are outside of the wealthy class pay about 50% of their income in taxes. Progressive taxation does not create a fair system for all. Many households end up paying more than they should be paying.
The pros and cons can create a system where income is generated to bring down the deficits and there are more domestic programs for individuals. All types of tax systems have their pros and cons and create injustice for some while benefits others.