Question

What is a progressive income tax system and how can an income tax system be structured so that it is progressive?

Answer 1

A progressive tax is a tax which imposes a lower rate of tax on low-income earners compared to those with a higher income, making it dependent on the ability of the taxpayer to pay. That means it takes a higher percentage of high-income earners than low-income people.

Individual income taxes and inheritance taxes are usually considered democratic. However, income taxes that are nominally progressive that become less so in the upper-income categories particularly if a taxpayer is permitted to reduce his tax base by claiming deductions or removing other components of income from his taxable income. When personal exemptions are declared, proportional tax rates which are extended to groups of lower income would also be more progressive.

Average rates of income tax reflect the percentage of total income owed in taxes. The pattern of average rates is the one applicable to the evaluation of taxation distribution equity. Under a graduated income tax the average rate of income tax increases with income. Average income tax levels generally rise with income, both because personal allowances are given to taxpayers and dependents and because marginal tax rates are graduated; on the other hand, preferential treatment of income earned disproportionately by high-income households may overwhelm those effects, resulting in regressivity, as indicated by average tax rates dropping as income rises.