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A progressive tax is a tax in which the tax rate increases as the taxable amount increases.[1][2][3][4][5] The
term progressive refers to the way the tax rate progresses from low to high, with the result that a taxpayers
average tax rate is less than the persons marginal tax
rate.[6][7] The term can be applied to individual taxes or
to a tax system as a whole; a year, multi-year, or lifetime.
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, where the relative tax rate or burden
decreases as an individuals ability to pay increases.[5]
A caricature of William Pitt the Younger collecting the newly introduced income tax.
Progressive taxation is often suggested as a way to mitigate the societal ills associated with higher income inequality,[12] as the tax structure reduces inequality,[13]
but economists disagree on the tax policys economic and
long-term eects.[14][15][16] Progressive taxation has also
been positively associated with happiness, the subjective
well-being of nations and citizen satisfaction with public
goods, such as education and transportation.[17]
Pitts 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
1 History
1801, after Pitts resignation over Catholic Emancipation.
The income tax was reintroduced by Addington in 1803
when hostilities recommenced, but it was again abolished
1.1 Early examples
in 1816, one year after the Battle of Waterloo. A tax on
In the early days of the Roman Republic, public taxes incomes over a certain amount is a two bracket graduated
consisted of assessments on owned wealth and property. progressive tax, similar to those still in use in Sweden.
The tax rate under normal circumstances was 1% of prop- Bottom brackets of 0% are almost universal, whether they
erty value, and could sometimes climb as high as 3% in are called earned income credits or appear explicitly in
situations such as war. These taxes were levied against tax tables.
The United Kingdom income tax 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 decit required
a new source of funds. The new income tax, based on
Addingtons model, was imposed on incomes above 150
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
1
(12,611 as of 2015),[19] . Although this measure was initially intended to be temporary, it soon became a xture
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 scal system.[21]
In the United States, the rst progressive income tax
was established by the Revenue Act of 1862. This was
signed into law by President Abraham Lincoln and repealed the at tax, which had had been brought in under
the Revenue Act of 1861. By the mid-20th century, most
countries had implemented some form of progressive income tax.[22]
ECONOMIC EFFECTS
Measuring progressivity
3 Economic eects
2.1
German marginal and average income tax rates display a progressive structure.
3
ment, 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]
Professor Robert H. Frank states that tax cuts for the
wealthy are largely spent on positional goods such as
larger houses and more expensive cars, which could have
been used to pay for things like improving public education and conducting medical research,[32] and suggests progressive taxation as an instrument for attacking
positional externalities.[33]
3.2
Educational attainment
Economist Gary Becker has described educational attainment as the root of economic mobility.[34] Progressive
tax rates, while raising taxes on high income, have the
goal and corresponding eect 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.[35][36] Increases in income for the poor
and economic equality reduces the inequality of educational attainment.[37][38] Tax policy can also include progressive features that provide tax incentives for education,
such as tax credits and tax exemptions for scholarships
and grants.[39][40]
A potentially adverse eect of progressive tax schedules is that they may reduce the incentives for educational attainment.[16][36][41] 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.[16][36][41] However, this eect can be mitigated
by an education subsidy funded by the progressive tax.[42]
Theoretically, public support for government spending on
higher education increases when taxation is progressive,
especially when income distribution is unequal.[43]
Psychological factors
ment social programs for low income earners, calls for increasing tax progressivity have sometimes been labeled as
envy or class warfare,[33][45][46] while others may describe
such actions as fair or a form of social justice.[46][47] Law
professor Marjorie Kornhauser has suggested that much
of the opposition to progressive taxation is caused by
ignorance, cognitive bias, and inammatory rhetoric, and
would be reduced if a nationwide education campaign
taught the public about progressive taxation and told them
that it benets their self-interests.[48]
5 Computation
There are two common ways of computing a progressive tax, corresponding to pointslope 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. The tax on $25,000 of income could then be
computed two ways. Using pointslope form (tax on bottom amount plus tax on marginal amount) yields:
Tax law professor Thomas Grith, summarizing research on human happiness, has argued that because
inequality in a society signicantly reduces happiness,
a progressive tax structure which redistributes income
would increase welfare and happiness in a society.[44] A
2011 social psychology study, 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- $3, 000+($25, 000$20, 000)30% = $1, 500+$3, 000 = $4, 500.
progressive taxation and higher levels of subjective wellbeing was mediated by citizens satisfaction with public Geometrically, the line for tax on the top bracket passes
goods, such as education and public transportation.[17]
through the point ($20,000, $3,000) and has a slope of
Since progressive taxation reduces the income of high 0.3 (30%).
earners and is often used as a method to fund govern- Alternatively, 30% tax on $20,000 yields 30% $20,000
7 SEE ALSO
= $6,000, which overstates tax on the bottom end of the Most systems around the world contain progressive astop bracket by $6,000 $3,000 = $3,000, so using slope pects. When taxable income falls within a particular tax
intercept form yields:
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
$25, 00030%$3, 000 = $7, 500$3, 000 = $4, 500. of taxable income (income after adjustments, deductions,
and exemptions) would be liable for 10% of each dollar
Geometrically, the line for tax on the top bracket inter- earned from the 1st dollar to the 7,550th dollar, and then
cepts the y-axis at $3,000 it passes through the point for 15% of each dollar earned from the 7,551st dollar to
the 10,000th dollar, for a total of $1,122.50.
(0, $3,000) and has a slope of 0.3 (30%).
In the United States, the rst form was used through 2003, In the United States, there are seven income tax brackets
ranging from 10% to 39.6% above an untaxed level of infor example (for the 2003 15% Single bracket):[49]
come based on the personal exemption and usually vari If the amount on Form 1040, line 40 [Taxable In- ous other tax exemptions, such as the Earned Income Tax
Credit and home mortgage payments. The US federal tax
come], is: Over 7,000
system also includes deductions for state and local taxes
for lower income households which mitigates what are
But not over 28,400
sometimes regressive taxes, particularly property taxes.
Enter on Form 1040, line 41 [Tax] $700.00 + 15% Higher income households are subject to the Alternative
Minimum Tax that limits deductions and sets a at tax
of the amount over 7,000
rate of 26% to 28% with the higher rate commencing at
$175,000 in income. There are also deduction phaseouts
From 2004, this changed to the second form, for example starting at $112,500 for single lers. The net eect is
(for the 2004 28% Single bracket):[50]
increased progressivity that completely limits deductions
for state and local taxes and certain other credits for indi Taxable income. If line 42 is At least $100,000 viduals earning more than $306,300.[52]
but not over $146,750
New Zealand has the following income tax brackets (for
the 20122013 nancial year): 10.5% up to NZ$14,000;
(a) Enter the amount from line 42
17.5% from $14,001 to $48,000; 30% from $48,001 to
(b) Multiplication amount 28% (.28)
$70,000; 33% over $70,001; and 45% when the employee does not complete a declaration form.[53] All val (c) Multiply (a) by (b)
ues are in New Zealand dollars and exclude the earner
levy.
(d) Subtraction amount $ 5,373.00
Examples
7 See also
Land value tax
Optimal tax
Pigovian tax
Property tax
Proportional tax
Redistribution of income and wealth
Distribution of US federal taxes from 1979 to 2013, based on
CBO Estimates.[51]
Regressive tax
Robin Hood eect
Suits index
5
Taxable income elasticity
Tax evasion
Tax incidence
Wealth tax
References
[5] Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), Concepts of Taxation,
Dryden Press: Fort Worth, TX
[21] Steven A. Bank (2011). Anglo-American Corporate Taxation: Tracing the Common Roots of Divergent Approaches.
Cambridge University Press. pp. 2829.
[6] Hyman, David M. (1990) Public Finance: A Contemporary Application of Theory to Policy, 3rd, Dryden Press:
Chicago, IL
[7] James, Simon (1998) A Dictionary of Taxation, Edgar Elgar Publishing Limited: Northampton, MA
[23] Philip B. Coulter: Measuring Inequality, 1989, ISBN 08133-7726-9 (This book describes about 50 dierent inequality measures.)
[29] Shlomo Yitzhaki (1998). More than a Dozen Alternative Ways of Spelling Gini (PDF). Economic Inequality
8: 1330.
[14] Piketty, Thomas, and Emmanuel Saez. Income Inequality in the United States, 19131998. Tech. 1st ed. Vol.
CXVIII. Quarterly Journal of Economics, 2003.
EXTERNAL LINKS
[54] Individual income tax rates. ato.gov.au. Australian Taxation Oce. Retrieved 15 May 2013.
9 External links
7
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 and 163149563
Apps, P. F., & Rees, R. (2014). Optimal taxation,
child care and models of the household.
10
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