Economists and political scientists often talk about progressive taxes, regressive taxes and flat taxes. Progressive taxes take a higher percentage of income from people with more income, regressive taxes take a higher percentage from people with less money coming in and a proportional, or flat tax, by definition takes an equal share of income from everyone. Proponents say a flat tax can be more fair, conducive to economic growth and easier to compute, although flat tax critics say a progressive tax is ultimately more just and can lead to more funds for public use.
The Progressive Federal Income Tax
The current U.S. income tax is usually considered a progressive tax. As you make more money, you move into higher tax brackets, where additional income is taxed at a higher rate than in lower brackets.
For example, as of 2018, if you make less than $9,525 as a single person, for each additional dollar you make, only 10 cents goes to the Internal Revenue Service, while if you make more than $500,000, each additional dollar is taxed at a 37 percent rate. The rate you pay on an additional dollar of income is called your marginal tax rate.
Congress changes tax brackets over time, and brackets for 2017 generally had taxpayers paying higher rates, but the progressive nature of the federal income tax system has been in place for a long time. At times, the rates on the highest tax brackets have been even higher than they are today.
Advocates of the current system, or one like it, say it is more just, since it taxes people making more money at a higher rate than poorer people, who need more of their income to survive. Some critics say an overly progressive tax structure can be unnecessarily punitive and can discourage people already earning good salaries from doing more work, even if that work can help create jobs or otherwise benefit society.
Understanding Regressive Taxes
A regressive tax is one that takes a disproportionately higher share of income from people earning less money. Some taxes in the United States are sometimes described as regressive taxes.
One example includes Social Security tax, which takes a flat rate of income up to a certain cutoff, known as the Social Security wage base. As of 2018, that level is $128,400, up from $127,200 in 2017. People earning more than the wage base pay a smaller percentage of their income in Social Security tax than people earning less than the wage base, with the percentage paid in that tax continually decreasing the more you earn.
State and local sales taxes, which usually charge a fixed percentage of the price paid for certain types of goods, are also sometimes called regressive taxes. That's because people with lower incomes often spend a greater percentage of their earnings, while people making more money put more away in the bank or investments. Therefore, a higher percentage of lower income earners' paychecks go to sales tax.
The same logic applies to import tariffs, which effectively raise the sale price of imported goods.
Flat Tax Definition and Examples
Flat taxes take an equal share of everyone's income, regardless of whether you make $20,000, $200,000 or $2,000,000 in a year. They're also sometimes called proportional taxes.
Some states have a flat income tax in place, though in practice, deductions and credits may make those taxes somewhat progressive or regressive. Internationally, some countries also have a flat income tax.
Medicare tax, which is paid by employers and employees on earned income to support the Medicare federal health insurance program for the elderly and some disabled people, was for a long time also sometimes cited as a real-world flat tax example, since it taxed all earned income at an equal rate. More recently, some additional Medicare tax was added for certain high earners, shifting Medicare to be more of a progressive tax.
Computational Benefits of Flat Tax
Some politicians and political thinkers say the United States should shift to a flat federal income tax.
One advantage is that a truly flat tax is easier to calculate. If all income is taxed at the same rate, it's easy for people to understand how much of each additional dollar in salary will go to tax and for people to file taxes without the aid of specialized software or professional tax preparers.
To achieve that level of simplicity, Congress would need to discard the current tax bracket structure as well as the complex array of deductions and credits. This could be a hard political sell, since many taxpayers rely on these deductions and credits that cover everything from earned income by people not making much money to mortgage interest and property taxes paid by people who own their own homes.
Some advocates of a flat tax call for eliminating separate federal taxes on income, including the Social Security and Medicare taxes, the long-term capital gains taxes paid on the sale of investments and real estate and the alternative minimum taxes paid by some high earners, shifting each of these special cases into the normal income tax. These would simplify filing but would also likely be a hard sell politically.
Flat Tax and Economic Growth
Proponents of a flat tax say the system can lead to economic growth. One argument is that higher earners would no longer feel discouraged from earning additional money by knowing that a significant portion would go to taxes and would be more incentivized to invest their money in creating new companies and jobs or simply working harder at their existing careers.
People also wouldn't feel incentivized to defer earnings when possible into lower tax years, which could lead to more efficient working and investing.
Critics of this argument say that efforts to stimulate economic growth by lowering taxes on high earners haven't consistently worked in the past.
Flat Tax and Fairness
Some of the biggest disagreements in disputes over progressive and flat tax pros and cons come from whether a flat tax or a progressive tax is fundamentally fairer.
Flat tax advocates often say a flat tax is fairer, since it taxes each dollar of income equally regardless of who earned it. Progressive tax fans counter that the progressive tax is fairer, since it helps to even out income distribution between the rich and poor and tax what's perceived as excess income by high earners.
The names progressive and regressive aren't meant to refer to anyone's politics, although in the United States people who identify as liberal or progressive are often more likely to favor a progressive tax while a flat tax is often advocated by people who identify as fiscal conservatives and libertarians.
Other Types of Tax
Whether other types of tax besides income tax are progressive or regressive can be difficult to determine.
For example, property taxes are usually proportional to the value of property that people own, although some states do allow homestead exemptions that make taxes only apply to the portion of property valued beyond a certain level or reduce taxes for elderly people, people with disabilities or veterans.
While higher income people often own more taxable property or more expensive properties, meaning they pay more in property tax, people with different incomes but similar properties will pay the same amount, which can mean a higher percentage of income paid by lower-income property owners.
- ConnectUS: List of 9 Main Pros and Cons of the Flat Tax
- Forbes: New: IRS Announces 2018 Tax Rates, Standard Deductions, Exemption Amounts And More
- Progressivism - Wikipedia
- Journal of Accountancy: Social Security Administration Announces Small Increase in 2018 Wage Base
- The Motley Fool: Will We Have a Flat Tax in the United States?
- Pass the FAIRtax | FAIRtax
- Internal Revenue Service. ”IRS provides tax inflation adjustments for tax year 2020.” Accessed Sept. 10, 2020.
- Tax Foundation. ”U.S. Federal Individual Income Tax Rates History, 1862-2013 (Nominal and Inflation-Adjusted Brackets).” Accessed Sept. 10, 2020.
- Internal Revenue Service. ”Publication 15,” Page 2. Accessed Sept. 10, 2020.
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.