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Wikipedia

Progressive tax

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]

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.

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]

Early examples

In the early days of the Roman Republic, public taxes consisted of assessments on owned wealth and property. For Roman citizens, the tax rate under normal circumstances was 1% of property value, and could sometimes climb as high as 3% in situations such as war. These taxes were levied against land, homes and other real estate, slaves, animals, personal items and monetary wealth. By 167 BC, Rome no longer needed to levy a tax against its citizens in the Italian peninsula, due to the riches acquired from conquered provinces. After considerable Roman expansion in the 1st century, Augustus Caesar introduced a wealth tax of about 1% and a flat poll tax on each adult; this made the tax system less progressive, as it no longer only taxed wealth.[17] In India under the Mughal Empire, the Dahsala system was introduced in A.D. 1580 under the reign of Akbar. This system was introduced by Akbar's finance minister, Raja Todar Mal, who was appointed in A.D. 1573 in Gujarat. The Dahsala system is a land-revenue system (system of taxation) which helped to make the collecting system be organised on the basis of land fertility.

Modern era

 
A caricature of William Pitt the Younger collecting the newly introduced income tax

The first modern income tax was introduced in Great Britain by Prime Minister William Pitt the Younger in his budget of December 1798, to pay for weapons and equipment for the French Revolutionary War. Pitt's new graduated (progressive) income tax began at a levy of 2 old pence in the pound (1120 or 0.83%) on annual incomes over £60 and increased up to a maximum of 2 shillings (10%) on incomes of over £200. Pitt hoped that the new income tax would raise £10 million, but actual receipts for 1799 totalled just over £6 million.[18]

Pitt's progressive income tax was levied from 1799 to 1802 when it was abolished by Henry Addington during the Peace of Amiens. Addington had taken over as prime minister in 1801, after Pitt's resignation over Catholic emancipation. The income tax was reintroduced by Addington in 1803 when hostilities recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo.

The present form of income tax in the United Kingdom was reintroduced by Sir Robert Peel in the Income Tax Act 1842. Peel, as a Conservative, had opposed income tax in the 1841 general election, but a growing budget deficit required a new source of funds. The new income tax, based on Addington's model, was imposed on incomes above £150. Although this measure was initially intended to be temporary, it soon became a fixture of the British taxation system. A committee was formed in 1851 under Joseph Hume to investigate the matter but failed to reach a clear recommendation. Despite the vociferous objection, William Gladstone, Chancellor of the Exchequer from 1852, kept the progressive income tax, and extended it to cover the costs of the Crimean War. By the 1860s, the progressive tax had become a grudgingly accepted element of the English fiscal system.[19]

In the United States, the first progressive income tax was established by the Revenue Act of 1862. The act was signed into law by President Abraham Lincoln, and replaced the Revenue Act of 1861, which had imposed a flat income tax of 3% on annual incomes above $800. The Sixteenth Amendment to the United States Constitution, adopted in 1913, permitted Congress to levy all income taxes without any apportionment requirement. By the mid-20th century, most countries had implemented some form of progressive income tax.[20]

Measuring progressivity

Indices such as the Suits index,[7] Gini coefficient, Kakwani index, Theil index, Atkinson index, and Hoover index have been created to measure the progressivity of taxation, using measures derived from income distribution and wealth distribution.[21]

Marginal and effective tax rates

 
German marginal and average income tax rates display a progressive structure.

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 the amount subject to taxation rises, though there may be ranges where the marginal rate will be constant. Usually, the average tax rate of a taxpayer will be lower than the marginal tax rate. In a system with refundable tax credits, or income-tested welfare benefits, it is possible for marginal rates to fall as income rises, at lower levels of income.[citation needed]

Inflation and tax brackets

Tax laws might not be accurately indexed to inflation. For example, some tax laws may ignore inflation completely. 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 rates. This phenomenon is known as bracket creep and can cause fiscal drag.[citation needed]

Economic effects

There is debate between politicians and economists over the role of tax policy in mitigating or exacerbating wealth inequality[citation needed] and the effects on economic growth.[citation needed]

Income equality

Progressive taxation has a direct effect on decreasing income inequality.[12] This is especially true if taxation is used to fund progressive government spending such as transfer payments and social safety nets.[11] However, the effect may be muted if the higher rates cause increased tax evasion.[12][22] When income inequality is low, aggregate demand will be relatively high, because more people who want ordinary consumer goods and services will be able to afford them, while the labor force will not be as relatively monopolized by the wealthy.[23][24] High levels of income inequality can have negative effects on long-term economic growth, employment, and class conflict.[25][26] Progressive taxation is often suggested as a way to mitigate the societal ills associated with higher income inequality.[11] 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.[27]

The economists Thomas Piketty and Emmanuel Saez wrote that decreased progressiveness in US tax policy in the post World War II era has increased income inequality by enabling the wealthy greater access to capital.[13]

According to economist Robert H. Frank, tax cuts for the wealthy are largely spent on positional goods such as larger houses and more expensive cars. Frank argues that these funds could instead pay for things like improving public education and conducting medical research,[28] and suggests progressive taxation as an instrument for attacking positional externalities.[29]

Economic growth

A report published by the OECD in 2008 presented empirical research showing a weak negative relationship between the progressivity of personal income taxes and economic growth.[14] Describing the research, William McBride, a staff writer with the conservative Tax Foundation, stated that progressivity of income taxes can undermine investment, risk-taking, entrepreneurship, and productivity because high-income earners tend to do much of the saving, investing, risk-taking, and high-productivity labor.[30][31] According to IMF, some advanced economies could increase progressivity in taxation for tackling inequality, without hampering growth, as long as progressivity is not excessive. Fund also states that the average top income tax rate for OECD member countries fell from 62 percent in 1981 to 35 percent in 2015, and that in addition, tax systems are less progressive than indicated by the statutory rates, because wealthy individuals have more access to tax relief.[32]

Educational attainment

Economist Gary Becker has described educational attainment as the root of economic mobility.[33] Progressive tax rates, while raising taxes on high income, have the goal and corresponding effect of reducing the burden on low income, improving income equality. Educational attainment is often conditional on cost and family income, which for the poor, reduces their opportunity for educational attainment.[34][35] Increases in income for the poor and economic equality reduces the inequality of educational attainment.[36][37] Tax policy can also include progressive features that provide tax incentives for education, such as tax credits and tax exemptions for scholarships and grants.[38][39]

A potentially adverse effect of progressive tax schedules is that they may reduce the incentives for educational attainment.[15][35][40] By reducing the after-tax income of highly educated workers, progressive taxes can reduce the incentives for citizens to attain education, thereby lowering the overall level of human capital in an economy.[15][35][40] However, this effect can be mitigated by an education subsidy funded by the progressive tax.[41] Theoretically, public support for government spending on higher education increases when taxation is progressive, especially when income distribution is unequal.[42]

Psychological factors

 
"Tax The Rich" banner at an International Union of Socialist Youth campaign for a financial transaction tax

A 2011 study psychologists Shigehiro Oishi, Ulrich Schimmack, and Ed Diener, using data from 54 countries, found that progressive taxation was positively associated with the subjective well-being, while overall tax rates and government spending were not. The authors added, "We found that the association between more-progressive taxation and higher levels of subjective well-being was mediated by citizens’ satisfaction with public goods, such as education and public transportation."[16] Tax law professor Thomas D. Griffith, summarizing research on human happiness, has argued that because inequality in a society significantly reduces happiness, a progressive tax structure which redistributes income would increase welfare and happiness in a society.[43] Since progressive taxation reduces the income of high earners and is often used as a method to fund government social programs for low income earners, calls for increasing tax progressivity have sometimes been labeled as envy or class warfare,[29][44][45] while others may describe such actions as fair or a form of social justice.[45][46]

Computation

 
The function which defines the progressive approach to an income tax, may be mathematically defined as a piecewise function. In every piece (tax bracket), it must be computed cumulatively, considering the taxes which had already been computed to the previous tax brackets. Pictured is the effective income tax for Portugal in 2012 and 2013.

There are two common ways of computing a progressive tax, corresponding to point–slope form and slope–intercept form of the equation for the applicable bracket. These compute the tax either as the tax on the bottom amount of the bracket plus the tax on the marginal amount within the bracket; or the tax on the entire amount (at the marginal rate), minus the amount that this overstates tax on the bottom end of the bracket.

For example, suppose there are tax brackets of 10%, 20%, and 30%, where the 10% rate applies to income from $1 to 10,000; the 20% rate applies to income from $10,001 to 20,000; and the 30% rate applies to all income above $20,000. In that case the tax on $20,000 of income (computed by adding up tax in each bracket) is  . The tax on $25,000 of income could then be computed two ways. Using point–slope form (tax on bottom amount plus tax on marginal amount) yields:

 
Geometrically, the line for tax on the top bracket passes through the point   and has a slope of 0.3 (30%).

Alternatively, 30% tax on $20,000 yields  , which overstates tax on the bottom end of the top bracket by  , so using slope–intercept form yields:

 
Geometrically, the line for tax on the top bracket intercepts the y-axis at −$3,000 – it passes through the point   – and has a slope of 0.3 (30%).

In the United States, the first form was used through 2003, for example (for the 2003 15% Single bracket):[47]

  • If the amount on Form 1040, line 40 [Taxable Income], is: Over— 7,000
  • But not over— 28,400
  • Enter on Form 1040, line 41 [Tax] $700.00 + 15%
  • of the amount over— 7,000

From 2004, this changed to the second form, for example (for the 2004 28% Single bracket):[48]

  • Taxable income. If line 42 is— At least $100,000 but not over $146,750
  • (a) Enter the amount from line 42
  • (b) Multiplication amount × 28% (.28)
  • (c) Multiply (a) by (b)
  • (d) Subtraction amount $5,373.00
  • Tax. Subtract (d) from (c). Enter the result here and on Form 1040, line 43

Examples

 
Distribution of US federal taxes from 1979 to 2013, based on CBO estimates[49]

Most systems around the world contain progressive aspects. When taxable income falls within a particular tax bracket, the individual pays the listed percentage of tax 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 (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.

In the United States, there are seven income tax brackets ranging from 10% to 39.6% above an untaxed level of income based on the personal exemption and usually various other tax exemptions, such as the Earned Income Tax Credit and home mortgage payments. The federal tax rates for individual taxpayers in the United States for the tax year 2021 are as follows: 10% from $0 to $9,950; 12% from $9,950 to $40,525; 22% from $40,525 to $86,375; 24% from $86,375 to $164,925; 32% from $164,925 to $209,425; 35% from $209,425 to $523,600; and 37% from $523,600 and over.[50] The US federal tax system also includes deductions for state and local taxes for lower income households which mitigates what are sometimes regressive taxes, particularly property taxes. Higher income households are subject to the alternative minimum tax that limits deductions and sets a flat tax rate of 26% to 28% with the higher rate commencing at $175,000 in income. There are also deduction phaseouts starting at $112,500 for single filers. The net effect is increased progressivity that completely limits deductions for state and local taxes and certain other credits for individuals earning more than $306,300.[51] In order to counteract regressive state and local taxes, many US states implement progressive income taxes.[52] 32 states and the District of Columbia have graduated-rate income taxes.[53] The brackets differ across states.

There has been a hefty decline in progressivity of the United States federal tax system since the 1960s. The two periods with the largest tax progressivity reductions occurred under the Reagan administration in the 1980s and the Bush administration in the 2000s.[54] The Tax Cuts and Jobs Act of 2017 implemented by President Trump greatly affected the United States tax system, making it much less progressive than it once was. The act took steps to dramatically lower taxes for high-income households, open deduction loopholes for businesses, and cut the federal corporate tax rate down to 21 percent.[55] It maintained the structure of seven tax brackets for personal income, but lowered five of the seven by one percent or more.[56]

Belgium has the following personal income tax rates (for the income year 2021): 25% from EUR€0 to €13,540; 40% from €13,540 to €23,900; 45% from €23,900 to €41,360; and 50% from €41,360 and any amount over.[57]

Canada has the following federal tax rates on income (for the year 2021): 15% from C$0 to $49,020; 20.5% from $49,020 to $98,040; 26% from $98,040 to $151,978; 29% from $151,978 to $216,511; and 33% on income over $216,511.[58]

Denmark has the following state tax rates regarding personal income: 12.11% for the bottom tax base; 15% for the top tax base, or income exceeding DKK 544,800. Additional taxes, such as the municipal tax (which has a country average of 24.971%), the labour market tax, and the church tax, are also applied to individual’s income.[59]

Germany has the following personal income tax rates for a single taxpayer (for the 2020 tax year): 0% up to EUR9,744; 14-42% from €9,744 to €57,918; 42% from €57,918 to €274,612; and 45% for €274,612 and any amount over.[60]

Norway has the following personal income tax rates (for the year 2020): 1.9% from NOK180,800 to NOK254,500; 4.2% from NOK254,500 to NOK639,750; 13.2% from NOK639,750 to NOK999,550; and 16.2% from NOK999,550 and above.[61]

Sweden has the following state income tax brackets for natural persons: 0% on income up to SEK 413,200; 20% from SEK 413,200 to SEK 591,600; and 25% from SEK 591,600 and any amount over.[62]

The United Kingdom has the following income tax rates: 0% from GBP£0 to £12,570; 20% from £12,571 to £50,270; 40% from £50,271 to £150,000; and 45% from £150,000 and over.[63] In Scotland, however, there are more tax brackets than in other UK countries. Scotland has the following additional income tax brackets: 19% from £12,571 to £14,667; 20% from £14,667 to £25,296; 21% from £25,297 to £43,662; 41% from £43,663 to £150,000; and 46% for any amount over £150,000.[64]

As of April 1st 2021 New Zealand has the following income tax brackets: 10.5% up to NZ$14,000; 17.5% from NZ$14,001 to NZ$48,000; 30% from NZ$48,001 to NZ$70,000; 33% from NZ$70,001 to NZ$180,000; 39% for any amount over NZ$180,000; and 45% when the employee does not complete a declaration form.[65] All values are in New Zealand dollars and exclude the earner levy.

Australia has the following progressive income tax rates (for the 2012–2013 financial year): 0% effective up to A$18,200; 19% from A$18,201 to A$37,000; 32.5% from A$37,001 to A$80,000; 37% from A$80,001 to A$180,000; and 45% for any amount over A$180,000.[66]

See also

References

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External links

progressive, progressive, which, rate, increases, taxable, amount, increases, term, progressive, refers, rate, progresses, from, high, with, result, that, taxpayer, average, rate, less, than, person, marginal, rate, term, applied, individual, taxes, system, wh. 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 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 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 Contents 1 Early examples 1 1 Modern era 2 Measuring progressivity 2 1 Marginal and effective tax rates 2 2 Inflation and tax brackets 3 Economic effects 3 1 Income equality 3 2 Economic growth 3 3 Educational attainment 4 Psychological factors 5 Computation 6 Examples 7 See also 8 References 9 External linksEarly examples EditIn the early days of the Roman Republic public taxes consisted of assessments on owned wealth and property For Roman citizens the tax rate under normal circumstances was 1 of property value and could sometimes climb as high as 3 in situations such as war These taxes were levied against land homes and other real estate slaves animals personal items and monetary wealth By 167 BC Rome no longer needed to levy a tax against its citizens in the Italian peninsula due to the riches acquired from conquered provinces After considerable Roman expansion in the 1st century Augustus Caesar introduced a wealth tax of about 1 and a flat poll tax on each adult this made the tax system less progressive as it no longer only taxed wealth 17 In India under the Mughal Empire the Dahsala system was introduced in A D 1580 under the reign of Akbar This system was introduced by Akbar s finance minister Raja Todar Mal who was appointed in A D 1573 in Gujarat The Dahsala system is a land revenue system system of taxation which helped to make the collecting system be organised on the basis of land fertility Modern era Edit A caricature of William Pitt the Younger collecting the newly introduced income tax The first modern income tax was introduced in Great Britain by Prime Minister William Pitt the Younger in his budget of December 1798 to pay for weapons and equipment for the French Revolutionary War Pitt s new graduated progressive income tax began at a levy of 2 old pence in the pound 1 120 or 0 83 on annual incomes over 60 and increased up to a maximum of 2 shillings 10 on incomes of over 200 Pitt hoped that the new income tax would raise 10 million but actual receipts for 1799 totalled just over 6 million 18 Pitt s progressive income tax was levied from 1799 to 1802 when it was abolished by Henry Addington during the Peace of Amiens Addington had taken over as prime minister in 1801 after Pitt s resignation over Catholic emancipation The income tax was reintroduced by Addington in 1803 when hostilities recommenced but it was again abolished in 1816 one year after the Battle of Waterloo The present form of income tax in the United Kingdom was reintroduced by Sir Robert Peel in the Income Tax Act 1842 Peel as a Conservative had opposed income tax in the 1841 general election but a growing budget deficit required a new source of funds The new income tax based on Addington s model was imposed on incomes above 150 Although this measure was initially intended to be temporary it soon became a fixture of the British taxation system A committee was formed in 1851 under Joseph Hume to investigate the matter but failed to reach a clear recommendation Despite the vociferous objection William Gladstone Chancellor of the Exchequer from 1852 kept the progressive income tax and extended it to cover the costs of the Crimean War By the 1860s the progressive tax had become a grudgingly accepted element of the English fiscal system 19 In the United States the first progressive income tax was established by the Revenue Act of 1862 The act was signed into law by President Abraham Lincoln and replaced the Revenue Act of 1861 which had imposed a flat income tax of 3 on annual incomes above 800 The Sixteenth Amendment to the United States Constitution adopted in 1913 permitted Congress to levy all income taxes without any apportionment requirement By the mid 20th century most countries had implemented some form of progressive income tax 20 Measuring progressivity EditIndices such as the Suits index 7 Gini coefficient Kakwani index Theil index Atkinson index and Hoover index have been created to measure the progressivity of taxation using measures derived from income distribution and wealth distribution 21 Marginal and effective tax rates Edit German marginal and average income tax rates display a progressive structure Main articles Marginal tax rate and Effective tax rate 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 the amount subject to taxation rises though there may be ranges where the marginal rate will be constant Usually the average tax rate of a taxpayer will be lower than the marginal tax rate In a system with refundable tax credits or income tested welfare benefits it is possible for marginal rates to fall as income rises at lower levels of income citation needed Inflation and tax brackets Edit Tax laws might not be accurately indexed to inflation For example some tax laws may ignore inflation completely 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 rates This phenomenon is known as bracket creep and can cause fiscal drag citation needed Economic effects EditThere is debate between politicians and economists over the role of tax policy in mitigating or exacerbating wealth inequality citation needed and the effects on economic growth citation needed Income equality Edit Main article Economic inequality Progressive taxation has a direct effect on decreasing income inequality 12 This is especially true if taxation is used to fund progressive government spending such as transfer payments and social safety nets 11 However the effect may be muted if the higher rates cause increased tax evasion 12 22 When income inequality is low aggregate demand will be relatively high because more people who want ordinary consumer goods and services will be able to afford them while the labor force will not be as relatively monopolized by the wealthy 23 24 High levels of income inequality can have negative effects on long term economic growth employment and class conflict 25 26 Progressive taxation is often suggested as a way to mitigate the societal ills associated with higher income inequality 11 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 27 The economists Thomas Piketty and Emmanuel Saez wrote that decreased progressiveness in US tax policy in the post World War II era has increased income inequality by enabling the wealthy greater access to capital 13 According to economist Robert H Frank tax cuts for the wealthy are largely spent on positional goods such as larger houses and more expensive cars Frank argues that these funds could instead pay for things like improving public education and conducting medical research 28 and suggests progressive taxation as an instrument for attacking positional externalities 29 Economic growth Edit A report published by the OECD in 2008 presented empirical research showing a weak negative relationship between the progressivity of personal income taxes and economic growth 14 Describing the research William McBride a staff writer with the conservative Tax Foundation stated that progressivity of income taxes can undermine investment risk taking entrepreneurship and productivity because high income earners tend to do much of the saving investing risk taking and high productivity labor 30 31 According to IMF some advanced economies could increase progressivity in taxation for tackling inequality without hampering growth as long as progressivity is not excessive Fund also states that the average top income tax rate for OECD member countries fell from 62 percent in 1981 to 35 percent in 2015 and that in addition tax systems are less progressive than indicated by the statutory rates because wealthy individuals have more access to tax relief 32 Educational attainment Edit Economist Gary Becker has described educational attainment as the root of economic mobility 33 Progressive tax rates while raising taxes on high income have the goal and corresponding effect of reducing the burden on low income improving income equality Educational attainment is often conditional on cost and family income which for the poor reduces their opportunity for educational attainment 34 35 Increases in income for the poor and economic equality reduces the inequality of educational attainment 36 37 Tax policy can also include progressive features that provide tax incentives for education such as tax credits and tax exemptions for scholarships and grants 38 39 A potentially adverse effect of progressive tax schedules is that they may reduce the incentives for educational attainment 15 35 40 By reducing the after tax income of highly educated workers progressive taxes can reduce the incentives for citizens to attain education thereby lowering the overall level of human capital in an economy 15 35 40 However this effect can be mitigated by an education subsidy funded by the progressive tax 41 Theoretically public support for government spending on higher education increases when taxation is progressive especially when income distribution is unequal 42 Psychological factors Edit Tax The Rich banner at an International Union of Socialist Youth campaign for a financial transaction tax A 2011 study psychologists Shigehiro Oishi Ulrich Schimmack and Ed Diener using data from 54 countries found that progressive taxation was positively associated with the subjective well being while overall tax rates and government spending were not The authors added We found that the association between more progressive taxation and higher levels of subjective well being was mediated by citizens satisfaction with public goods such as education and public transportation 16 Tax law professor Thomas D Griffith summarizing research on human happiness has argued that because inequality in a society significantly reduces happiness a progressive tax structure which redistributes income would increase welfare and happiness in a society 43 Since progressive taxation reduces the income of high earners and is often used as a method to fund government social programs for low income earners calls for increasing tax progressivity have sometimes been labeled as envy or class warfare 29 44 45 while others may describe such actions as fair or a form of social justice 45 46 Computation Edit The function which defines the progressive approach to an income tax may be mathematically defined as a piecewise function In every piece tax bracket it must be computed cumulatively considering the taxes which had already been computed to the previous tax brackets Pictured is the effective income tax for Portugal in 2012 and 2013 There are two common ways of computing a progressive tax corresponding to point slope form and slope intercept form of the equation for the applicable bracket These compute the tax either as the tax on the bottom amount of the bracket plus the tax on the marginal amount within the bracket or the tax on the entire amount at the marginal rate minus the amount that this overstates tax on the bottom end of the bracket For example suppose there are tax brackets of 10 20 and 30 where the 10 rate applies to income from 1 to 10 000 the 20 rate applies to income from 10 001 to 20 000 and the 30 rate applies to all income above 20 000 In that case the tax on 20 000 of income computed by adding up tax in each bracket is 10 10 000 20 10 000 1 000 2 000 3 000 displaystyle 10 times 10 000 20 times 10 000 1 000 2 000 3 000 The tax on 25 000 of income could then be computed two ways Using point slope form tax on bottom amount plus tax on marginal amount yields 3 000 25 000 20 000 30 1 500 3 000 4 500 displaystyle 3 000 25 000 20 000 times 30 1 500 3 000 4 500 Geometrically the line for tax on the top bracket passes through the point 20 000 3 000 displaystyle 20 000 3 000 and has a slope of 0 3 30 Alternatively 30 tax on 20 000 yields 30 20 000 6 000 displaystyle 30 times 20 000 6 000 which overstates tax on the bottom end of the top bracket by 6 000 3 000 3 000 displaystyle 6 000 3 000 3 000 so using slope intercept form yields 25 000 30 3 000 7 500 3 000 4 500 displaystyle 25 000 times 30 3 000 7 500 3 000 4 500 Geometrically the line for tax on the top bracket intercepts the y axis at 3 000 it passes through the point 0 3 000 displaystyle 0 3 000 and has a slope of 0 3 30 In the United States the first form was used through 2003 for example for the 2003 15 Single bracket 47 If the amount on Form 1040 line 40 Taxable Income is Over 7 000 But not over 28 400 Enter on Form 1040 line 41 Tax 700 00 15 of the amount over 7 000From 2004 this changed to the second form for example for the 2004 28 Single bracket 48 Taxable income If line 42 is At least 100 000 but not over 146 750 a Enter the amount from line 42 b Multiplication amount 28 28 c Multiply a by b d Subtraction amount 5 373 00 Tax Subtract d from c Enter the result here and on Form 1040 line 43Examples Edit Distribution of US federal taxes from 1979 to 2013 based on CBO estimates 49 See also Tax rates around the world Most systems around the world contain progressive aspects When taxable income falls within a particular tax bracket the individual pays the listed percentage of tax 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 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 In the United States there are seven income tax brackets ranging from 10 to 39 6 above an untaxed level of income based on the personal exemption and usually various other tax exemptions such as the Earned Income Tax Credit and home mortgage payments The federal tax rates for individual taxpayers in the United States for the tax year 2021 are as follows 10 from 0 to 9 950 12 from 9 950 to 40 525 22 from 40 525 to 86 375 24 from 86 375 to 164 925 32 from 164 925 to 209 425 35 from 209 425 to 523 600 and 37 from 523 600 and over 50 The US federal tax system also includes deductions for state and local taxes for lower income households which mitigates what are sometimes regressive taxes particularly property taxes Higher income households are subject to the alternative minimum tax that limits deductions and sets a flat tax rate of 26 to 28 with the higher rate commencing at 175 000 in income There are also deduction phaseouts starting at 112 500 for single filers The net effect is increased progressivity that completely limits deductions for state and local taxes and certain other credits for individuals earning more than 306 300 51 In order to counteract regressive state and local taxes many US states implement progressive income taxes 52 32 states and the District of Columbia have graduated rate income taxes 53 The brackets differ across states There has been a hefty decline in progressivity of the United States federal tax system since the 1960s The two periods with the largest tax progressivity reductions occurred under the Reagan administration in the 1980s and the Bush administration in the 2000s 54 The Tax Cuts and Jobs Act of 2017 implemented by President Trump greatly affected the United States tax system making it much less progressive than it once was The act took steps to dramatically lower taxes for high income households open deduction loopholes for businesses and cut the federal corporate tax rate down to 21 percent 55 It maintained the structure of seven tax brackets for personal income but lowered five of the seven by one percent or more 56 Belgium has the following personal income tax rates for the income year 2021 25 from EUR 0 to 13 540 40 from 13 540 to 23 900 45 from 23 900 to 41 360 and 50 from 41 360 and any amount over 57 Canada has the following federal tax rates on income for the year 2021 15 from C 0 to 49 020 20 5 from 49 020 to 98 040 26 from 98 040 to 151 978 29 from 151 978 to 216 511 and 33 on income over 216 511 58 Denmark has the following state tax rates regarding personal income 12 11 for the bottom tax base 15 for the top tax base or income exceeding DKK 544 800 Additional taxes such as the municipal tax which has a country average of 24 971 the labour market tax and the church tax are also applied to individual s income 59 Germany has the following personal income tax rates for a single taxpayer for the 2020 tax year 0 up to EUR 9 744 14 42 from 9 744 to 57 918 42 from 57 918 to 274 612 and 45 for 274 612 and any amount over 60 Norway has the following personal income tax rates for the year 2020 1 9 from NOK180 800 to NOK254 500 4 2 from NOK254 500 to NOK639 750 13 2 from NOK639 750 to NOK999 550 and 16 2 from NOK999 550 and above 61 Sweden has the following state income tax brackets for natural persons 0 on income up to SEK 413 200 20 from SEK 413 200 to SEK 591 600 and 25 from SEK 591 600 and any amount over 62 The United Kingdom has the following income tax rates 0 from GBP 0 to 12 570 20 from 12 571 to 50 270 40 from 50 271 to 150 000 and 45 from 150 000 and over 63 In Scotland however there are more tax brackets than in other UK countries Scotland has the following additional income tax brackets 19 from 12 571 to 14 667 20 from 14 667 to 25 296 21 from 25 297 to 43 662 41 from 43 663 to 150 000 and 46 for any amount over 150 000 64 As of April 1st 2021 New Zealand has the following income tax brackets 10 5 up to NZ 14 000 17 5 from NZ 14 001 to NZ 48 000 30 from NZ 48 001 to NZ 70 000 33 from NZ 70 001 to NZ 180 000 39 for any amount over NZ 180 000 and 45 when the employee does not complete a declaration form 65 All values are in New Zealand dollars and exclude the earner levy Australia has the following progressive income tax rates for the 2012 2013 financial year 0 effective up to A 18 200 19 from A 18 201 to A 37 000 32 5 from A 37 001 to A 80 000 37 from A 80 001 to A 180 000 and 45 for any amount over A 180 000 66 See also EditCompound empowerment Democratic socialism Economic progressivism Equity in taxation Graduated income tax Optimal tax Redistribution of income and wealth Robin Hood effect Social democracy Suits index Taxable income elasticity Tax bracket Tax evasion Tax incidence X taxContrasting models Proportional tax Regressive taxReferences Edit progressive Merriam Webster 4b increasing in rate as the base increases 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 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 a b Sommerfeld Ray M Madeo Silvia A Anderson Kenneth E Jackson Betty R 1992 Concepts of Taxation Fort Worth Texas Dryden Press Hyman David M 1990 Public Finance A Contemporary Application of Theory to Policy 3rd ed Chicago Illinois Dryden Press James Simon 1998 A Dictionary of Taxation Northampton Massachusetts Edgar Elgar a b Suits Daniel B September 1977 Measurement of Tax Progressivity American Economic Review 67 4 747 752 JSTOR 1813408 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 a href Template Cite web html title Template Cite web cite web a CS1 maint bot original URL status unknown link 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 Schaefer Jeffrey M September 1969 Clothing Exemptions and Sales Tax Regressivity The American Economic Review 59 4 Part 1 pp 596 599 JSTOR 1813222 a b c Pickett Kate Wilkinson Richard 26 April 2011 The Spirit Level Why Greater Equality Makes Societies Stronger Bloomsbury ISBN 978 1608193417 a b c 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 a b Piketty Thomas Saez Emmanuel 2003 Income Inequality in the United States 1913 1998 PDF Quarterly Journal of Economics 1st ed CXVIII a b 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 a b c 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 a b 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 Roman Taxes Unrv com Retrieved on 2014 04 12 A tax to beat Napoleon HM Revenue amp Customs Archived from the original on 27 January 2013 Retrieved 18 February 2023 Bank Steven A 2011 Anglo American Corporate Taxation Tracing the Common Roots of Divergent Approaches Cambridge University Press pp 28 29 ISBN 9781139502597 James Kathryn 2011 Exploring the Origins and Global Rise of VAT Journal of Economics 35 4 15 22 SSRN 2291281 Philip B Coulter Measuring Inequality 1989 ISBN 0 8133 7726 9 This book describes about 50 different inequality measures Duncan Denvil Klara Sabirianova Peter October 2012 Unequal Inequalities Do Progressive Taxes Reduce Income Inequality PDF Institute for the Study of Labor The Economics of Welfare Arthur Cecil Pigou Andrew Berg and Jonathan D Ostry 2011 Inequality and Unsustainable Growth Two Sides of the Same Coin IMF Staff Discussion Note SDN 11 08 International Monetary Fund Alesina Alberto Dani Rodrick May 1994 Distributive Politics and Economic Growth Quarterly Journal of Economics 109 2 465 90 doi 10 2307 2118470 JSTOR 2118470 Castells Quintana David Vicente Royuela 2012 Unemployment and long run economic growth The role of income inequality and urbanisation PDF Investigaciones Regionales 12 24 153 173 hdl 10017 27066 Retrieved 17 October 2013 Shlomo Yitzhaki 1998 More than a Dozen Alternative Ways of Spelling Gini PDF Economic Inequality 8 13 30 Frank Robert H Positional Externalities Cause Large and Preventable Welfare Losses PDF American Economic Association Archived from the original PDF on July 7 2015 Retrieved March 17 2014 a b Frank Robert H June 2003 Are Positional Externalities Different from Other Externalities PDF Brookings Institution Archived from the original PDF on 21 December 2012 Retrieved 17 March 2014 McBride William 18 December 2012 What Is the Evidence on Taxes and Growth Tax Foundation Retrieved 2 January 2014 McBride William 20 February 2013 Comments on Who Pays A Distributional Analysis of the Tax Systems in All 50 States Tax Foundation Retrieved 2 January 2014 Fiscal policy can make the difference International Monetary Fund IMF 11 October 2017 Retrieved 12 October 2017 Becker Gary S 15 October 2013 Becker Explores the Roots of Upward Mobility The University of Chicago Archived from the original on 2 February 2016 Retrieved 24 January 2014 Campbell Mary Haveman R Sandefur G Wolfe B 2005 11 Economic inequality and educational attainment across a generation Focus 23 3 11 15 we found that family income and wealth have positive and statistically significant links to attainment children who grow up in families with higher income and greater wealth receive more schooling a b c Mueller Richard May 2008 Access and Persistence of Students from Low Income Backgrounds in Canadian Post Secondary Education A Review of the Literature MESA Project Educational Policy Institute SSRN 2256110 students from low income backgrounds are more sensitive to changes in tuition and aid packages than their colleagues from higher income families as are students attending community colleges compared to universities Campbell Mary Haveman R Sandefur G Wolfe B 2005 11 Economic inequality and educational attainment across a generation PDF Focus 23 3 11 15 Implications of increased economic inequality Average achievement goes up slightly but so does the variability of achievement Average years of schooling increase by less than 1 percent Inequality in contrast increases substantially by over 8 percent when all four measures of inequality are considered together Moreover a higher proportion of students do not complete high school or 11th grade Checchi Daniele May 2001 Education Inequality and Income Inequality Distributional Analysis Research Programme Papers 52 Suntory and Toyota International Centres for Economics and Related Disciplines LSE income inequality effectively reduces school enrollment mainly at secondary level a href Template Cite journal html title Template Cite journal cite journal a Cite journal requires journal help Growth in Means Tested Programs and Tax Credits for Low Income Households Congressional Budget Office 11 February 2013 Retrieved 28 January 2014 Rachel Johnson James Nunns Jeffrey Rohaly Eric Toder Roberton Williams July 2011 Why Some Tax Units Pay No Income Tax PDF Tax Policy Center Retrieved 28 January 2014 a href Template Cite web html title Template Cite web cite web a CS1 maint uses authors parameter link a b Heckman J L Lochner and C Tabner Tax Policy and Human Capital Formation American Economic Review 88 293 297 Accessed 31 July 2012 Krueger Dirk Ludwig Alexander May 2013 Optimal Progressive Labor Income Taxation and Education Subsidies When Education Decisions and Intergenerational Transfers Are Endogenous American Economic Review 103 3 496 501 doi 10 1257 aer 103 3 496 S2CID 17244958 Ansell Ben 2010 From the Ballot to the Blackboard The Redistributive Political Economy of Education Cambridge University Press p 175 Under conditions of high income inequality and tax progressivity there will be even greater support for higher education spending even if most people do not receive it Griffith Thomas D 2004 Progressive Taxation And Happiness Boston College Law Review 45 5 1363 Powell Jim 17 October 2012 Class Warfare The Mortal Enemy Of Economic Growth And Jobs Forbes Retrieved 3 February 2014 a b Kim Susanna 19 September 2011 Warren Buffett Rule Class Warfare or Tax Fairness ABC News Retrieved 3 February 2014 Egypt constitution panel rejects article on progressive taxation Ahram Online 11 November 2013 retrieved 3 February 2014 Form 1040 Instructions 2003 2003 Tax Rate Schedules p 74 Form 1040 Instructions 2004 2004 Tax Computation Worksheet Line 43 p 72 The Distribution of Household Income and Federal Taxes 2010 The US Congressional Budget Office CBO 4 December 2013 Retrieved 6 January 2014 IRS provides tax inflation adjustments for tax year 2021 Internal Revenue Service www irs gov Retrieved 22 April 2021 26 USC 55 Also see IRS Form 6251 individuals and Form 4626 corporations Institute on Taxation and Economic Policy 2018 Who pays A distributional analysis of the tax systems in all 50 states https itep org whopays Loughead Katherine State Individual Income Tax Rates and Brackets Tax Foundation Retrieved 22 April 2021 Piketty Thomas Saez Emmanuel 1 January 2007 How Progressive is the U S Federal Tax System A Historical and International Perspective Journal of Economic Perspectives 21 1 3 24 doi 10 1257 jep 21 1 3 ISSN 0895 3309 S2CID 5160267 Hendricks Galen 28 October 2020 6 Ways the Trump Administration Is Rigging an Already Unfair Tax Code Center for American Progress Retrieved 22 April 2021 U S Full Bio Follow Linkedin Kimberly Amadeo is an expert on Economies World investing Analysis With Over 20 Years of Experience in Economic Amadeo business strategy She is the President of the economic website World Money Watch Read The Balance s editorial policies Kimberly How Trump s Tax Reform Plan Affects You The Balance Retrieved 22 April 2021 a href Template Cite web html title Template Cite web cite web a first5 has generic name help Belgium Individual Taxes on personal income taxsummaries pwc com Retrieved 22 April 2021 Canadian income tax rates for individuals current and previous years aem 30 December 2020 Retrieved 22 April 2021 Denmark Individual Taxes on personal income taxsummaries pwc com Retrieved 22 April 2021 Germany Individual Taxes on personal income taxsummaries pwc com Retrieved 22 April 2021 Norway Income Tax KPMG Global KPMG 2 March 2021 Retrieved 22 April 2021 skatteverket se Skatteverket Belopp och procent inkomstar 2013 privat www skatteverket se in Swedish Retrieved 22 April 2021 Income Tax rates and Personal Allowances GOV UK Retrieved 22 April 2021 Income Tax in Scotland GOV UK Retrieved 22 April 2021 Tax rates for individuals ird govt nz Inland Revenue Department New Zealand Retrieved 9 November 2022 Individual income tax rates ato gov au Australian Taxation Office Archived from the original on 29 June 2011 Retrieved 15 May 2013 68 https www jagranjosh com general knowledge dahsala system 1408960979 1 External links Edit Wikiquote has quotations related to Taxation The Progressive Income Tax Theoretical Foundations Slemrod Joel B 2002 Progressive Taxes In David R Henderson ed Concise Encyclopedia of Economics 1st ed Library of Economics and Liberty OCLC 317650570 50016270 163149563 Retrieved from https en wikipedia org w index php title Progressive tax amp oldid 1143808389, wikipedia, wiki, book, books, library,

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