All about a Progressive Tax

A progressive tax is a tax that imposes a greater percentual burden on the rich than on the poor. The opposite is a regressive tax, which imposes a greater percentual burden on the poor than on the rich. Due to the very high level meaning of the term, there can be significant.

Progressive tax does not necessarily refer to something that grows as the numbers involved grow as is the case with progressive income tax. A hypothetical tax on luxury goods can have a flat rate and the tax remains a progressive tax. Yet the most commonly referenced form of progressive taxation is the personal income tax, where people with more disposable income pay a higher percentage of that income in tax than do those with less income.

In between progressive and regressive taxation is a proportional taxation (flat tax is close to this), where the tax rate is fixed. The proportional taxes are only used for incomes, as taxes on consumption could only be made proportional if the buyer’s income would be included in the taxes applied. Progressive taxes attempt to reduce the tax incidence of people with a lower ability-to-pay, as they shift the incidence disproportionately to those with a higher ability-to-pay. The whole topic of progressive taxation can be split in to two distinct categories:

  • Progressive Income Taxation (income tax, capital gains tax, inheritance tax, payroll tax etc)
  • Progressive Consumption Taxation (VAT, gas tax and others, all which are essentially sales taxes)

There are also some mix-ups with progressivism the ideology, under which high gas taxes might be called progressive. However, gas taxes are actually extremely regressive in developed countries. It is interesting to note that the development status of a country affects whether a given consumption tax is regressive or progressive: in a country where the majority of the population goes to work in a car gas tax is regressive, whereas it would be progressive in a country where only the rich have cars.

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