In progressive tax regimes, the wealthy pay more into the public purse than those further down the income scale. The United States operates a system of progressive income taxation. In 2012, single American taxpayers earning between $0 and $8,700 paid 10 percent of their earnings in federal income taxes, while those fortunate enough to earn over $388,350 had to hand over 35 percent of their income. Some people would like to see the country's tax regime become even more progressive by increasing the amount the rich have to pay, while others support the introduction of a system of flat taxation in which all taxpayers would pay a the same rate, regardless of income. There are also tax reformers who argue the country should do away with income tax entirely and switch to a model of taxation based on consumption.
Proponents of progressive income taxation systems argue that they ensure that those with the broadest shoulders bear the greatest burden. Flat-tax regimes result in those on lower incomes losing a greater proportion of their disposable income, due in part to the fact that they have to pay the same regressive taxes as the rich on the goods and services they buy. In a progressive system, taxes are collected from higher earners and money redistributed to those further down the income scale through social security benefits and government spending on public services such as schools and hospitals.
Opponents of progressive income tax systems claim that they stifle innovation and encourage high-worth individuals to hide their money offshore or leave the country in search of more lenient tax regimes. The argument goes that high earners will be discouraged from making more money or decide to hide some of their income if they're forced to hand more of it over to the Internal Revenue Service. Supporters of a flat tax point to evidence that tax receipts from the rich rise when the rate they're asked to pay goes down. When the top rate of tax was slashed from 73 percent to 25 percent in the 1920s, the share of taxes paid by those who made more than $100,000 a year -- more than $1 million in today's money -- increased from 28 percent to 51 percent, according to The Wall Street Journal.
In a progressive income tax system, when an individual's income falls, so does the tax burden. This can provide some protection to mostly low- and middle-income taxpayers when the economy takes a turn for the worse, although the rich can also benefit if a fall in their income pushes them into a lower tax band. Under flat income tax regimes, governments may be forced to pay out more benefits to lower income individuals and families who are over-stretched by having to pay a higher rate of income tax. Administering the payment of these benefits would cost money that would have to come out of the public purse.
Fairness and Transparency
Many people argue that the progressive tax system in the U.S. is anything but. By their very nature, progressive tax regimes are incredibly complex, and can actually be harnessed to benefit the super-wealthy. As of November 2012, single taxpayers earning between $35,350 and $85,650 paid 25 percent of their salary to the federal taxman. At the same time, multibillionaires were paying 15 percent income tax on "carried interest" from their investments. The investor Warren Buffet paid just 17.4 percent of his taxable income in taxes in 2012. Supporters of a flat tax claim that taxing all income at the same rate, regardless of where it comes from, is a much simpler and fairer system of taxation.
Alternatives to the Progressive Income Tax Model
Some economists and tax reformers argue that the U.S. should do away with its system of progressive income taxation and introduce a flat levy on consumption. In his book, "The Real Tax Burden: More Than Dollars and Cents," the author Alan Viard argues that taxing goods and services instead of income and savings would encourage economic growth by incentivising companies to save and invest more. It's also often argued that the progressive income tax model disincentivises workers from boosting their earnings through fear of being taxed at a higher rate. Consumption levies such as VAT and sales taxes are typically regressive in nature due to the fact that paying them accounts for a greater proportion of income the poorer a taxpayer is. As part of his 2012 presidential campaign, Libertarian Gary Johnson called for a "23 percent nationwide sales tax that applies only to new goods and services" to replace progressive income tax. Johnson added a progressive element to his FairTax proposals by suggesting a monthly rebate or tax credit "to offset payment of the FairTax on purchases of necessities up to the federal poverty level."
- U.S. News & World Report: Flat Tax Is Class Warfare
- Internal Revenue Service: Employer's Tax Guide
- Forbes: 2012 Federal Income Tax Brackets (IRS Tax Rates)
- CNN: Let's Kill the Progressive Tax Rate System
- Library of Economics and Liberty: Progressive Taxes
- The Wall Street Journal: Why Lower Tax Rates Are Good for Everyone
- The New York Times: Stop Coddling the Super-Rich
- American Enterprise Institute: Returning to an Economic Growth Agenda
- Forbes: Why The Fair Tax Will Fail
- Gary Johnson 2012: Presidential Candidate Gary Johnson Calls For Fair Tax While Visiting New Hampshire Business Incubator
- 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.
Michael Roennevig has been a journalist since 2003. He has written on politics, the arts, travel and society for publications such as "The Big Issue" and "Which?" Roennevig holds a Bachelor of Arts in journalism from the Surrey Institute and a postgraduate diploma from the National Council for the Training of Journalists at City College, Brighton.