All tax schemes can be characterized as either progressive or regressive. Progressive taxes require those with higher incomes to pay a higher percentage of their income on those particular taxes. The impact of regressive taxes is exactly the opposite: they require those with lower incomes to pay a higher percentage of their income on such taxes. Show
Most income tax schemes are progressive because they usually rely on graduated rates which increase the percentage of income paid as income rises. In contrast property and sales taxes tend to be regressive in nature by virtue of the fact that they make everybody pay the same flat rate. But if everybody pays the same flat rate shouldn't such taxes be considered neutral, neither progressive nor regressive? The key to understanding these concepts is to focus exclusively on the percentage of one's income that is paid for each type of tax. A look at how the numbers work in these tax schemes helps illustrate the concepts of progressive and regressive taxes. The next two tabs illustrate progressive and regressive taxation schemes. First we review the federal income tax rates for 2005. Then we examine a hypothetical example of sales taxes paid on a flat screen television set. Top
Updated for Tax Year 2022 • November 17, 2022 02:20 PM OVERVIEW Progressive, regressive, and flat taxes are all different tax systems governments can deploy. Learn what each of these types of taxation means for you. Different types of taxesThe taxes you pay on your income and purchases can take several forms, including progressive tax, regressive tax, and flat taxes. But what is a progressive tax? And how does it compare to a regressive or flat tax? What is a progressive tax?A progressive tax is when the tax rate you pay increases as your income rises. In the U.S., the federal income tax is progressive. There are graduated tax brackets, with rates ranging from 10% to 37%. For the 2022 tax year (tax returns filed in 2023), those tax brackets are:
In 2022, if you’re single and have $15,000 of taxable income, you’re in the 12% tax bracket, while if you’re single and have taxable income of $600,000, you’re in the 37% tax bracket. But this doesn't mean that all your income is taxed at that rate, as there's a difference between a marginal tax rate and an effective tax rate. If you have $15,000 of taxable income, you have a 12% marginal tax rate, but your effective tax rate is lower. That's because when your income enters a higher tax bracket, only the income that falls into that higher bracket is taxed at the higher rate. In 2022, you would calculate your tax bill as follows:
Your total tax bill comes to $1,594.50. While there are a few ways to calculate effective tax rate, the simplest way is to divide you total tax by your taxable income. TurboTax calculates effective tax rate in a more sophisticated way by adjusting for various recaptured taxes and tax credits.
Progressive tax pros and consProgressive taxes are popular because they shift the burden of paying taxes to those who are likely most able to pay. Like federal income tax, progressive tax systems typically allow several deductions and credits. These tax breaks provide additional relief for low-income taxpayers, as is the case with the Earned Income Tax Credit. They can also encourage certain behaviors. For example, the mortgage interest deduction encourages homeownership, and the American Opportunity Tax Credit encourages people to pursue higher education. But some tax breaks can also make it possible for high-income taxpayers to pay less tax than lower-income people. For example, preferential rates on long-term capital gains sometimes result in wealthy taxpayers paying a lower rate overall than their middle-class counterparts. Inflation can also cause "bracket creep." This is when taxpayers are pushed into a higher tax bracket, even though their higher income doesn't give them more buying power. What is a regressive tax?A regressive tax is the opposite of a progressive tax because you pay a higher tax rate as your income decreases. There are two types of regressive taxes. Proportional taxProportional taxes are when everyone pays the same tax rate, regardless of income. Sales taxes are typically regressive proportional taxes because everyone pays the same rate, regardless of income.
Flat taxFlat taxes are when everyone pays the same amount, regardless of income. Flat taxes are typically a flat rate rather than a flat dollar amount. Some states add a flat excise tax to car registrations. For example, say Myra and Darnell are both registering their cars, and the state adds a flat fee of $100 to every car registration. That $100 flat tax makes up 5% of Darnell's monthly income but only 2% of Myra's monthly income. Pros and cons of tax structuresFlat taxes are appealing because they're simple: You pay a flat rate, and your tax calculations are done. But as illustrated in the examples above, regressive taxes place more of the tax burden on people with lower incomes — many of whom currently pay little or no income tax at all. For that reason, most "flat tax" proposals are a modified proportional tax. While the details vary from plan to plan, these proposals often:
For most of us, paying taxes is inevitable. But the impact they have depends on the tax system used and your income. Let an expert do your taxes for you, start to finish with TurboTax Live Full Service. Or you can get your taxes done right, with experts by your side with TurboTax Live Assisted. File your own taxes with confidence using TurboTax. Just answer simple questions, and we’ll guide you through filing your taxes with confidence. Whichever way you choose, get your maximum refund guaranteed. All you need to know is yourself
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business. What is the difference between progressive and regressive taxes?progressive tax—A tax that takes a larger percentage of income from high-income groups than from low-income groups. proportional tax—A tax that takes the same percentage of income from all income groups. regressive tax—A tax that takes a larger percentage of income from low-income groups than from high-income groups.
What are examples of progressive and regressive taxes?Property taxes are an example of a regressive tax; the U.S. federal income tax is a progressive tax example; and occupational taxes are a type of proportional tax.
What are 2 examples of regressive taxes?Key Takeaways
They take a higher percentage of income on the poor than on high-income earners. Taxes on most consumer goods, sales, gas, and Social Security payroll are examples of regressive taxes. Pigouvian and sin taxes are specific types of regressive taxes.
What is the difference between a progressive tax and a regressive tax quizlet?Regressive taxes are when higher income people pay a smaller percent of income than the lower income people (state and city sales taxes). Progressive taxes are when higher income people pay a greater percent of their income compared to lower income people (federal income taxes).
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