Progressive tax - AbsoluteAstronomy.com

A progressive tax is a tax

Tax

To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income

Income

Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...

or expenditure

Consumption (economics)

Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...

, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate. It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Progressive taxes attempt to reduce the tax incidence

Tax incidence

In economics, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to "fall" upon the group that, at the end of the day, bears the burden of the tax...

of people with a lower ability-to-pay, as they shift the incidence increasingly to those with a higher ability-to-pay.

The term is frequently applied in reference to personal income tax

Income tax

An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...

es, where people with more income

Income

pay a higher percentage of that income in tax than do those with less income. It can also apply to adjustment of the tax base by using tax exemption

Tax exemption

Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Tax exemption may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some...

s, tax credits, or selective taxation that would create progressive distributional effects. For example, a sales tax on luxury good

Luxury good

Luxury goods are products and services that are not considered essential and associated with affluence.The concept of luxury has been present in various forms since the beginning of civilization. Its role was just as important in ancient western and eastern empires as it is in modern societies...

s or the exemption of basic necessities may be described as having progressive effects as it increases a tax burden on high end consumption or decreases a tax burden on low end consumption respectively.

Progressive taxation often must be considered as part of an overall system since tax codes have many interdependent variables. For example, when refundable tax credits and other tax incentives are included across the entire income spectrum, the United States has the most progressive income tax code among its peer nations, although its overall income tax rates are below the OECD

Organisation for Economic Co-operation and Development

The Organisation for Economic Co-operation and Development is an international economic organisation of 34 countries founded in 1961 to stimulate economic progress and world trade...

average.

The opposite of a progressive tax is a regressive tax

Regressive tax

A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the...

, where the relative tax rate or burden increases as an individual's ability to pay it decreases. Sales taxes are often criticized because low income households must pay a greater share of their disposable income to a sales tax than wealthier households. In between is a proportional tax

Proportional tax

A proportional tax is a tax imposed so that the tax rate is fixed. The amount of the tax is in proportion to the amount subject to taxation. "Proportional" describes a distribution effect on income or expenditure, referring to the way the rate remains consistent , where the marginal tax rate is...

, where the tax rate is fixed as the amount subject to taxation increases.

History of intellectual debate

The idea of a progressive tax has garnered support from macro economists and political scientists of many different ideologies - ranging from Adam Smith

Adam Smith

Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

to Karl Marx

Karl Marx

Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...

, although there are differences of opinion about the optimal level of progressivity. Some economists trace the origin of modern progressive taxation to Adam Smith, who wrote in The Wealth of Nations
The Wealth of Nations
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith...

:
The French Declaration of the Rights of Man and of the Citizen
Declaration of the Rights of Man and of the Citizen
The Declaration of the Rights of Man and of the Citizen is a fundamental document of the French Revolution, defining the individual and collective rights of all the estates of the realm as universal. Influenced by the doctrine of "natural right", the rights of man are held to be universal: valid...

of 1789 agrees:

In most western European countries and the United States, advocates of progressive taxation tend to be found among the majority of economists and social scientists, many of whom believe that completely proportional taxation is not a possibility. In the U.S., an overwhelming majority of economists (81%) support progressive taxation. Given the diversity of systems that fall under this category and the number of different possible rates, this is not surprising.

Arguments for implementation

The higher one's income, the greater the fraction of it that tends to consist of economic rent
Economic rent
Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....

rather than rewards for any commensurate contribution to production. By definition, economic rent is a factor payment exceeding that required to place a factor in its most productive use, so it can be taxed away entirely without impairing wealth production. Consequently, in the absence of taxes specifically levied on economic rent, a steeply progressive tax on the highest incomes can be expected to fall almost exclusively on economic rent, minimizing the excess burden of such taxation.

In a market economy
Market economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...

, the larger an investment is, the higher its rate of return. This is due to both economies of scale
Economies of scale
Economies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...

and the increased range of investment opportunities. In addition to these economic forces, those who control greater amounts of capital within a society are able to participate more directly in shaping government policy, often in ways that further maximize their wealth. Thus, due to both economic and political realities within a market economy, it is a natural process for the wealthiest individuals and firms in a society to become disproportionately wealthier over time. In order to prevent the political instability resulting from the natural stratification of the populace into an ever smaller and wealthier aristocracy
Aristocracy
Aristocracy , is a form of government in which a few elite citizens rule. The term derives from the Greek aristokratia, meaning "rule of the best". In origin in Ancient Greece, it was conceived of as rule by the best qualified citizens, and contrasted with monarchy...

or moneyed class, and an ever larger working class
Working class
Working class is a term used in the social sciences and in ordinary conversation to describe those employed in lower tier jobs , often extending to those in unemployment or otherwise possessing below-average incomes...

, free market democracies should support progressive taxation and programs to enhance economic opportunity for the lower and middle class
Middle class
The middle class is any class of people in the middle of a societal hierarchy. In Weberian socio-economic terms, the middle class is the broad group of people in contemporary society who fall socio-economically between the working class and upper class....

es.

A progressive tax reduces income inequality, which has been reported to have a number of societal benefits, such as lower homicide rates at all income levels. A steeper progressive income tax results in an even more equal distribution of income across the board. The difference between the Gini index for an income distribution before taxation and the Gini index after taxation is an indicator for the effects of such taxation. Richard G. Wilkinson argues that in a more unequal society, even middle class people on good incomes are likely to be less healthy, less likely to be involved in community life, more likely to be obese, and more likely to be victims of violence. Amongst the wealthiest quarter of countries, there is no relation between a country's wealth and general population health, but within a country, relative levels can have an effect.

In response to the concern that progressive taxation creates an unfair psychological burden on the wealthy; if the utility
Utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....

gained from income exhibits diminishing marginal returns
Diminishing returns
In economics, diminishing returns is the decrease in the marginal output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant.The law of diminishing returns In economics, diminishing returns (also...

, as many psychologists assert (see Weber-Fechner law), then for the tax burden to be shared in a utilitarian way the tax-bill must increase non-linearly with income.

As income levels rise, marginal propensity to consume
Marginal propensity to consume
In economics, the marginal propensity to consume is an empirical metric that quantifies induced consumption, the concept that the increase in personal consumer spending occurs with an increase in disposable income...

tends to drop. Thus it is often argued that economic demand can be stimulated by reducing the tax burden on lower incomes while raising the burden on higher incomes

People with higher income tend to have a higher percentage of that in discretionary income, and can thus afford a greater tax burden (this is the “vertical equity” argument). Some would claim that a person earning exactly enough money to pay for food and housing cannot afford to pay any taxes without its causing material damage, while someone earning twice as much can afford to pay up to half their income in taxes.

Some believe that the wealthy have a disproportionately greater interest in maintaining societal goods typically supported by taxation such as security of property rights, defense
National security
National security is the requirement to maintain the survival of the state through the use of economic, diplomacy, power projection and political power. The concept developed mostly in the United States of America after World War II...

and infrastructure
Infrastructure
Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...

, as they have much more to lose if these fail than do the poor. Public investments in defense and foreign aid often support assets abroad whose expropriation
Nationalization
Nationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...

is a far greater risk than is the risk involving domestic investments.

As long as after-tax income is a strictly increasing function of gross income, there is a monetary incentive to increase compensation received. Indeed, for any particular income goal, the higher the tax rate, the more compensation one must receive to reach that income goal. For this reason, progressive income tax may increase the incentive to produce among the largest producers (if higher production is truly associated with higher compensation).

Arguments against implementation

It has been argued that progressive taxation violates the principle of equality under the law.
Progressive taxes lower savings rates. High-earners have a lower average propensity to consume, so shifting the tax-burden away from them will increase the aggregate savings rate, which should increase steady state
Steady state
A system in a steady state has numerous properties that are unchanging in time. This implies that for any property p of the system, the partial derivative with respect to time is zero:...

growth (if the savings rate is initially below the Golden Rule savings rate
Golden Rule savings rate
In economics, the Golden Rule savings rate is the rate of savings which maximizes steady state level or growth of consumption , as for example in the Solow growth model...

).
- The classical argument against progressive taxation runs as follows:
  The diminishing returns argument applies to the fraction of income used for present consumption. As income rises, diminishing returns implies that a smaller and smaller fraction of income will be spent on consumption goods. The remaining income will (of necessity) be used to purchase capital goods. This acts as a form of positive feedback that in turn yields more income for capital spending. Meanwhile (and because) these capital goods induce a decline in the costs of production which has the effect of raising real wages generally and implicitly raising the general standard of living. The income paid back on the capital helps create the disincentive to consume that creates capital spending. Thus, those capitalists who effectively manage their property are rewarded and given control of more (newly created) property, of which they are increasingly less inclined to consume and increasingly more inclined to purchase capital goods and thus further elevate the general standard of living by driving down the costs of production. As they acquire more capital goods, eventually their ownership outstrips their ability to manage and oversee what they own; however, they control only as many capital goods as can be attributed to the income of their prior capital---which previously did not exist. Therefore, their ownership does not negatively contribute to the general standard-of-living relative to counterfactual state of them not purchasing those goods. It would thus be misleading to argue that redistributing their capital may yield further increases in the standard-of-living. Doing so may well cause that effect, but doing so neglects that it was the assumption that redistribution would not happen that induced the accumulation of capital. — Eugen von Böhm-Bawerk
  Eugen von Böhm-Bawerk
  Eugen Ritter von Böhm-Bawerk was an Austrian economist who made important contributions to the development of the Austrian School of economics.-Biography:...
  
  , Karl Marx and the Close of his System, 1896
- A belief that progressive taxation shifts the total economic production of society away from capital investments (tools, infrastructure, training, research) and toward present consumption goods. This could happen because high-income earners tend to pay for capital goods (through investment activities) and low-income earners tend to purchase consumables. Smithian
  Adam Smith
  Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
  
  and neo-classical growth
  Exogenous growth model
  The neoclassical growth model, also known as the Solow–Swan growth model or exogenous growth model, is a class of economic models of long-run economic growth set within the framework of neoclassical economics...
  
  theory says that spending more on consumption goods and less on capital goods will slow the rise of the standard of living
  Standard of living
  Standard of living is generally measured by standards such as real income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality and educational standards are also used. Examples are access to certain goods , or measures of health such as...
  
  , and possibly even reduce it since capital goods increase future production possibilities.
Brain drain and tax avoidance. High progressive taxes may encourage emigration
Emigration
Emigration is the act of leaving one's country or region to settle in another. It is the same as immigration but from the perspective of the country of origin. Human movement before the establishment of political boundaries or within one state is termed migration. There are many reasons why people...

because taxes are not internationally harmonized, so very high earners are sometimes able to relocate in order to pay less tax
Tax competition
Tax competition, a form of regulatory competition, exists when governments are encouraged to lower fiscal burdens to either encourage the inflow of productive resources or discourage the exodus of those resources...

, or find tax haven
Tax haven
A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....

s for their income. Unlike the opposing income effect
Income effect
In economics, the consumer's preferences, money income and prices play an important role in solving the consumer's optimization problem...

and substitution effect of leisure which may make tax progressivity neutral in terms of working hours, the emigration rate must increase
Monotonic function
In mathematics, a monotonic function is a function that preserves the given order. This concept first arose in calculus, and was later generalized to the more abstract setting of order theory....

with the top rates of tax.
- The differential in the higher rates of tax between the United States
  United States
  The United States of America is a federal constitutional republic comprising fifty states and a federal district...
  
  and Europe are cited as a factor in the "brain drain
  Brain drain
  Human capital flight, more commonly referred to as "brain drain", is the large-scale emigration of a large group of individuals with technical skills or knowledge. The reasons usually include two aspects which respectively come from countries and individuals...
  
  " of high-earners to America in the 1960s, and is considered an important influence on modern "economic migration."
Increase in tax loopholes such as income splitting
Income splitting
Income splitting is the legal concept of fusing a married couple into a single economic entity for purposes of tax filing status. It would treat married people preferentially, in the same sense they are treated preferentially in many areas of American state law as well as federal inheritance...

techniques. This creates an incentive for business owners to split their business into smaller, less efficient ones for a lower tax bracket. It also encourages production from less efficient smaller businesses than larger ones.
The increasing energy expended on tax avoidance
Tax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...

s which occur with greater progressivity produces an increase in the work of accountant
Accountant
An accountant is a practitioner of accountancy or accounting , which is the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities and others make decisions about allocating resources.The Big Four auditors are the largest...

s and lawyer
Lawyer
A lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...

s. Because tax avoidance creates no net wealth this work is unproductive, and can make taxes on the rich less efficient than on the middle class, who have less motivation to exploit tax loopholes.
Progressive taxes are argued to create work disincentive. Consider again someone who makes twice the minimum required to live on but pays all income above the minimum living threshold in taxes. Such a person had no monetary incentive at all to try to increase his or her income above the base level.
Justice in representation: economic equity
Equity (economics)
Equity is the concept or idea of fairness in economics, particularly as to taxation or welfare economics. More specifically it may refer to equal life chances regardless of identity, to provide all citizens with a basic minimum of income/goods/services or to increase funds and commitment for...

is sometimes used to argue against progressive taxation, on the grounds of representation being out-of-proportion to taxation: While the top 5% in income in most countries pay over half the taxes they have only 5% of the voting weight. This argument can be reversed into the plutocratic case that if tax is to be progressive it should be accompanied by greater say in elections for those who contribute most.
Policymakers are argued to be under a pressure from lower and middle income voters to limit higher incomes by the means of progressive taxation. A few economists argue against inequity aversion
Inequity aversion
Inequity aversion is the preference for fairness and resistance to incidental inequalities. The social sciences that study inequity aversion include sociology, economics, psychology, anthropology and ethology.-Human studies:...

: "If policy makers' primary goal is … economic prosperity for all, they should avoid focusing on the politics of envy." (Gregory Mankiw)
A study from the libertarian
Libertarianism
Libertarianism, in the strictest sense, is the political philosophy that holds individual liberty as the basic moral principle of society. In the broadest sense, it is any political philosophy which approximates this view...

Institute for Policy Innovation, which aims to reduce government intervention in the economy, has concluded that progressive taxes fail to decrease real
Real income
Real income is the income of individuals or nations after adjusting for inflation. It is calculated by subtracting inflation from the nominal income...

income inequality.
Some libertarians, especially anarcho-capitalists
Anarcho-capitalism
Anarcho-capitalism is a libertarian and individualist anarchist political philosophy that advocates the elimination of the state in favour of individual sovereignty in a free market...

, argue that only poll tax
Poll tax
A poll tax is a tax of a portioned, fixed amount per individual in accordance with the census . When a corvée is commuted for cash payment, in effect it becomes a poll tax...

es can be economically efficient in the fullest sense (the utilitarian
Utilitarianism
Utilitarianism is an ethical theory holding that the proper course of action is the one that maximizes the overall "happiness", by whatever means necessary. It is thus a form of consequentialism, meaning that the moral worth of an action is determined only by its resulting outcome, and that one can...

view), and/or that equity
Equity (economics)
Equity is the concept or idea of fairness in economics, particularly as to taxation or welfare economics. More specifically it may refer to equal life chances regardless of identity, to provide all citizens with a basic minimum of income/goods/services or to increase funds and commitment for...

requires each citizen to pay the full exchange value
Exchange value
In political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market...

in trade for governance services such as the guarantee of property rights (the natural rights
Natural rights
Natural and legal rights are two types of rights theoretically distinct according to philosophers and political scientists. Natural rights are rights not contingent upon the laws, customs, or beliefs of any particular culture or government, and therefore universal and inalienable...

viewpoint).

Measuring progressivity

Models such as the Suits index

Suits index

The Suits index of a public policy is a measure of collective progressivity, named for economist Daniel B. Suits. Similar to the Gini coefficient, the Suits index is calculated by comparing the area under the Lorenz curve to the area under a proportional line...

, Gini coefficient

Gini coefficient

The Gini coefficient is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" ....

, Theil index

Theil index

The Theil index is a statistic used to measure economic inequality. It has also been used to measure the lack of racial diversity. The basic Theil index TT is the same as redundancy in information theory which is the maximum possible entropy of the data minus the observed entropy. It is a special...

, Atkinson index

Atkinson index

The Atkinson index is a measure of income inequality developed by British economist Anthony Barnes Atkinson...

, and Robin Hood index

Robin Hood index

The Hoover index is a measure of income inequality. It is equal to the portion of the total community income that would have to be redistributed for there to be perfect equality....

are sometimes used to factor progressivity through measures of inequality of income distribution

Income inequality metrics

The concept of inequality is distinct from that of poverty and fairness. Income inequality metrics or income distribution metrics are used by social scientists to measure the distribution of income, and economic inequality among the participants in a particular economy, such as that of a specific...

or inequality of wealth distribution.

Effective progression

An effective progression can be computed from inequality measures. The following example uses the Gini coefficient:

Inflation and tax brackets

Many tax laws are not accurately indexed to inflation. Either they ignore inflation completely, or they are indexed to the Consumer Price Index

Consumer price index

A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...

(CPI), which tends to understate real inflation. In a progressive tax system, failure to index the brackets to inflation will eventually result in effective tax increases (if inflation is sustained), as inflation in wages will increase individual income and move individuals into higher tax brackets with higher percentage rate. One example is the United States Alternative Minimum Tax

Alternative Minimum Tax

The Alternative Minimum Tax is an income tax imposed by the United States federal government on individuals, corporations, estates, and trusts. AMT is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold . This exemption is substantially higher than the...

; since it is not indexed to inflation, an increasing number of upper-middle-income taxpayers have been finding themselves subject to this tax.

Marginal and effective tax rates

The rate of tax can be expressed in two different ways, the marginal rate expressed as the rate on each additional unit of income or expenditure (or last dollar spent) and the effective (average) rate expressed as the total tax paid divided by total income or expenditure. In most progressive tax systems, both rates will rise as amount subject to taxation rises, though there may be ranges where the marginal rate will be constant. With a system of negative income tax

Negative income tax

In economics, a negative income tax is a progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government. Such a system has been discussed by economists but never fully implemented...

, refundable tax credits, or income-tested welfare benefits, it is possible for marginal rates to fall as amount subject to taxation rises: this can still be seen as progressive providing that the marginal rate is higher than the average rate at any particular level, since the average rate will rise; high marginal rates for those with low means can lead to a poverty trap

Welfare trap

The welfare trap theory asserts that taxation and welfare systems can jointly contribute to keep people on social insurance because the withdrawal of means tested benefits that comes with entering low-paid work causes there to be no significant increase in total income...

within a progressive system, even if they face negative average rates.

Income

The key concept of progressive income taxation is that income is considered in different steps, where income earned between certain points will be taxed at a certain rate. This is done to avoid creating incentive traps, where earning more might actually decrease your income (e.g., if income up to 10,000 is untaxed and after 10,001 you pay 10%, you will receive 9,000.90 if you make 10,001 and 10,000 if you make 10,000). The size and severity of the different steps varies a great deal and the differences inside the term "progressive" can be enormous. In this sense, it is not surprising that most economists support progressive taxation to some degree - the primary differences come when looking at the maximum income taxes that the highest earners might have to pay.

Expenditure

While a tax on expenditures can be structured like a pure sales tax

Sales tax

A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....

, many proposals make adjustments to decrease regressive

Regressive tax

effects. Using exemptions

Tax exemption

, graduated rates, deductions

Tax deduction

Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...

, credits or rebates

Tax refund

A tax refund or tax rebate is a refund on taxes when the tax liability is less than the taxes paid. Taxpayers can often get a tax refund on their income tax if the tax they owe is less than the sum of the total amount of the withholding taxes and estimated taxes that they paid, plus the...

, a consumption tax

Consumption tax

A consumption tax is a tax on spending on goods and services. The tax base of such a tax is the money spent on consumption. Consumption taxes are usually indirect, such as a sales tax or a value added tax...

can be made less regressive or progressive, while allowing savings to accumulate tax-free. A sales tax on luxury good

Luxury good

s or the exemption of basic necessities

Basic needs

The basic needs approach is one of the major approaches to the measurement of absolute poverty. It attempts to define the absolute minimum resources necessary for long-term physical well-being, usually in terms of consumption goods. The poverty line is then defined as the amount of income...

may be described as having progressive effects as it increases a tax burden on high end consumption or decreases a tax burden on low end consumption respectively. Economist Alan J. Auerbach of University of California, Berkeley

University of California, Berkeley

The University of California, Berkeley , is a teaching and research university established in 1868 and located in Berkeley, California, USA...

states that "annual income is not an especially accurate measure of one's ability to pay. A household's consumption tends to fluctuate less from year to year than its income does, and in some respects offers a better measure of a family's sustainable standard of living. Averaged over periods longer than one year, which smoothes out fluctuations in annual income, consumption taxes look less regressive relative to income than they look on an annual basis." Tax reform

Tax reform

Tax reform is the process of changing the way taxes are collected or managed by the government.Tax reformers have different goals. Some seek to reduce the level of taxation of all people by the government. Some seek to make the tax system more progressive or less progressive. Some seek to simplify...

proposals that transition from an income tax to a consumption tax would be more equitable because consumption requires a balance between known and complex social costs.

Implementation

There are various ways that a progressive income tax can be implemented:

Increasing percentage rates

When implementing a progressive tax with increasing percentage rates, the percentage of tax of each dollar increases as the total revenue (or income) increases. For example, a tax of 15% on all income earned up to $50,000, plus a tax of 25% on each dollar earned between $50,001 and $100,000, plus a tax of 34% of all income earned above $100,000. The United States

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

currently uses increasing percentage rates in the form of tax brackets.

Single tax rate

A progressive tax rate can also be achieved by combining a single flat rate with a threshold (or deduction

Tax deduction

). For example, all income up to $100,000 is earned tax free; income above $100,000 is taxed at 35%.

Formula

A progressive tax rate can also be achieved by mathematical formula. A simple progressive tax is described by a linear equation

Linear equation

A linear equation is an algebraic equation in which each term is either a constant or the product of a constant and a single variable....

of the form y=mx+b, relating tax rate y to income x with the slope

Slope

In mathematics, the slope or gradient of a line describes its steepness, incline, or grade. A higher slope value indicates a steeper incline....

m being greater than zero. Setting the slope m to zero would convert this to a flat tax. A progressive tax by formula can also implement a negative income tax

Negative income tax

by setting the y-axis intercept b to a value less than zero. No additional verbiage is needed to implement a negative income tax within a progressive tax system. Tax rates can be altered as often as needed by simply adjusting the values of the variables in the equation, no rewriting of tax laws, codes, etc. are needed. More complex progressive systems can be created by using a non-linear equation.

Examples

Most systems around the world contain progressive aspects. New Zealand

New Zealand

New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...

has the following income tax brackets (as of 1 October 2008): 12.5% up to NZ$14,000, 21% from $14,001 to $40,000, 33% $40,001 to $70,000, 39% over $70,001, and 45% when the employee does not complete a declaration form. Australia

Australia

Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...

has the following progressive income tax brackets: 0% effective up to A$6000 (PAYG

Pay-as-you-go tax

Pay as you go is a system for businesses and individuals to pay installments of their expected tax liability on their income from employment, business, or investment for the current income year...

taxed at 15% then fully rebatable at the end of the financial year), 15% from $6001 to $25000, 30% from $25001 to $75000, 40% from $75001 to $150000, and 45% tax for any amount over $150000. All values in New Zealand dollars and exclude the earner levy.

In the United States

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

, there are five "tax brackets." ranging from 10% to 35%. used to calculate the percentage of taxable income (of individuals).

If taxable income falls within a particular tax bracket, the individual pays the listed percentage of income on each dollar that falls within that monetary range. For example, a person in the U.S. who earned $10,000 US of taxable income

Taxable income

Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that...

(income after adjustments, deductions, and exemptions) would be liable for 10% of each dollar earned from the 1st dollar to the 7,550th dollar, and then for 15% of each dollar earned from the 7,551st dollar to the 10,000th dollar, for a total of $1,122.50. This ensures that every rise in a person's salary results in an increase of after-tax salary.

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History of intellectual debate

Arguments for implementation

Arguments against implementation

Measuring progressivity

Effective progression

Inflation and tax brackets

Marginal and effective tax rates

Income

Expenditure

Implementation

Increasing percentage rates

Single tax rate

Formula

Examples

See also

External links