Progressive tax

Average tax rates by income groups in France, the United Kingdom, and the United States, 1970 (left) and 2005 (right). Taxes were more progressive in 1970 than in 2005.

A progressive tax is a tax in which the tax rate increases as the taxable amount increases.[1][2][3][4] The term progressive refers to the way the tax rate progresses from low to high, with the result that a taxpayer's average tax rate is less than the person's marginal tax rate.[5][6] The term can be applied to individual taxes or to a tax system as a whole. Progressive taxes are imposed in an attempt to reduce the tax incidence of people with a lower ability to pay, as such taxes shift the incidence increasingly to those with a higher ability-to-pay. The opposite of a progressive tax is a regressive tax, such as a sales tax, where the poor pay a larger proportion of their income compared to the rich.[4]

The term is frequently applied in reference to personal income taxes, in which people with lower income pay a lower percentage of that income in tax than do those with higher income. It can also apply to adjustments of the tax base by using tax exemptions, tax credits, or selective taxation that creates progressive distribution effects. For example, a wealth or property tax,[7] a sales tax on luxury goods, or the exemption of sales taxes on basic necessities, may be described as having progressive effects as it increases the tax burden of higher income families and reduces it on lower income families.[8][9][10]

Progressive taxation is often suggested as a way to mitigate the societal ills associated with higher income inequality,[11] as the tax structure reduces inequality,[12] but economists disagree on the tax policy's economic and long-term effects.[13][14][15] One study suggests progressive taxation can be positively associated with happiness, the subjective well-being of nations and citizen satisfaction with public goods, such as education and transportation.[16]

  1. ^ "progressive". Merriam–Webster. "(4b): increasing in rate as the base increases"
  2. ^ "progressive". American Heritage Dictionary of the English Language (4th ed.). Archived from the original on 9 February 2009. (6). Increasing in rate as the taxable amount increases
  3. ^ "progressive tax". WordNet. Princeton University. Retrieved 17 February 2023. progressive tax, graduated tax (any tax in which the rate increases as the amount subject to taxation increases)
  4. ^ a b Sommerfeld, Ray M.; Madeo, Silvia A.; Anderson, Kenneth E.; Jackson, Betty R. (1992). Concepts of Taxation. Fort Worth, Texas: Dryden Press.
  5. ^ Hyman, David M. (1990). Public Finance: A Contemporary Application of Theory to Policy (3rd ed.). Chicago, Illinois: Dryden Press.
  6. ^ James, Simon (1998). A Dictionary of Taxation. Northampton, Massachusetts: Edgar Elgar.
  7. ^ Suits, Daniel B. (September 1977). "Measurement of Tax Progressivity". American Economic Review. 67 (4): 747–752. JSTOR 1813408.
  8. ^ "Internal Revenue Service". Archived from the original on 16 August 2007. Retrieved 27 March 2009. The luxury tax is a progressive tax – it takes more from the wealthy than from the poor.{{cite web}}: CS1 maint: bot: original URL status unknown (link)
  9. ^ "Luxury tax". Britannica Online Encyclopedia. Archived from the original on 7 July 2012. Excise levy on goods or services considered to be luxuries rather than necessities. Modern examples are taxes on jewelry and perfume. Luxury taxes may be levied with the intent of taxing the rich ...
  10. ^ Schaefer, Jeffrey M. (September 1969). "Clothing Exemptions and Sales Tax Regressivity". The American Economic Review. 59 (4). Part 1, pp. 596–599. JSTOR 1813222.
  11. ^ Pickett, Kate; Wilkinson, Richard (26 April 2011). The Spirit Level: Why Greater Equality Makes Societies Stronger. Bloomsbury. ISBN 978-1608193417.
  12. ^ Moyes, P. (1988). "A note on minimally progressive taxation and absolute income inequality". Social Choice and Welfare. 5 (2–3): 227–234. doi:10.1007/BF00735763. Retrieved 19 May 2012.
  13. ^ Piketty, Thomas; Saez, Emmanuel (2003). "Income Inequality in the United States, 1913–1998" (PDF). Quarterly Journal of Economics (1st ed.). CXVIII.
  14. ^ Arnold, Jens (14 October 2008). "Do Tax Structures Affect Aggregate Economic Growth? Empirical Evidence From A Panel of OECD Countries". OECD. Retrieved 2 January 2014.
  15. ^ Becker, Gary S.; Murphy, Kevin M. (May 2007). "The Upside of Income Inequality". American Enterprise Institute. Archived from the original on January 2, 2014. Retrieved January 8, 2014.
  16. ^ Oishi, Shigehiro; Schimmack, Ulrich; Diener, Ed (2012). "Progressive Taxation and the Subjective Well-Being of Nations". Psychological Science. 23 (1): 86–92. doi:10.1177/0956797611420882. PMID 22157676. S2CID 8211113.

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