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DEFINITION:
A progressive tax system is one in which the tax rate a person pays increases in proportion to his or her income.
Understanding progressive tax
In a progressive tax system, higher earners pay a higher tax rate than lower earners. In this type of tax system, we assume that those who earn a lot of money can afford to spend a larger share of it on taxes, while those who earn little need more of it to make ends meet. A tax system can become more or less progressive by increasing or decreasing the spread between the highest and lowest tax rates. In the United States, the income tax is progressive, meaning that as income increases, so does the tax rate. Several other taxes, such as the estate tax, are also progressive taxes, while others – such as the sales tax – are regressive taxes. A regressive tax means that low-income earners pay a higher percentage of their income in taxes.
Takeaway
A progressive tax system is like an airplane…
The better your seat on the plane, the higher the price of your ticket. The worse your seat is, the less you have to pay. Likewise, the better your income is, the more taxes you have to pay – not just in dollars, but as a percentage of your income.