What are Regressive, Proportional and Progressive Taxes?

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Definition:

Regressive, proportional, and progressive taxes are the three different types of taxes that make up the tax system.

🤔 Understanding regressive, proportional, and progressive taxes

Taxes fall into one of three categories based on the ratio of tax to income that you have to pay: regressive, proportional, or progressive. Regressive taxes require you to pay a higher percentage of your individual income in taxes as your income decreases. Progressive taxes are the opposite, with the percentage of income you pay in taxes increasing as your income rises. Finally, proportional taxes result in everyone paying the same percentage of their income. The United States has a progressive income tax system — People who make more money move into higher tax brackets, requiring them to pay a higher percentage in income tax. But the United States also has regressive taxes, such as sales and property taxes.

Example

It’s likely that each of us has encountered regressive, proportional, and progressive taxes at some point. If you work for a corporation, your company has to pay corporate taxes on its profit at a rate of 21%. Every C-Corporation pays the same tax rate, making this tax proportional. Your company also takes money out of your paycheck to pay your income taxes, and the amount you’ll owe in taxes increases as your income increases — This is an example of a progressive tax. Finally, after you get your paycheck, you might head to the store to pick up a few things for your house. At the store, you pay sales tax on the items you buy. The sales tax is a regressive tax, since the percentage of income that you pay toward the tax increases as your income decreases. Since everyone pays the same sales tax rate, someone who makes less money uses more of their income to pay the tax than someone who makes a higher salary.

Takeaway

Regressive, proportional, and progressive taxes are like escalators moving in different directions…

The three types of taxes are categorized based on how they affect people of different incomes. Progressive taxes are like a down escalator, because the percentage of income you pay toward a tax decreases as your income decreases. Regressive taxes are like an up escalator, because the percentage that you pay increases as income decreases. Proportional taxes are like the moving walkways you’d find at an airport, because the percentage doesn’t increase or decrease based on income.

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What are regressive, proportional, and progressive taxes?

Regressive, proportional, and progressive taxes are the three types of taxes that make up the tax system in the United States. They differ in terms of how they impact you based on your income. With regressive taxes, the lower your income is, the higher the percentage of income you will pay. Progressive taxes are the opposite, meaning the percentage of your income that you pay increases as your income increases. Finally, proportional taxes result in everyone paying the same portion of their income in a tax.

What are regressive taxes?

A regressive tax results in the amount that you pay as a percentage of your income increasing as your income decreases. As your income decreases, the regressive taxes take up a bigger chunk.

Regressive taxes often come in the form of a flat tax. But while everyone pays the same amount, it’s regressive because it affects their tax-to-income ratio differently. A sales tax is a flat tax, since everyone pays the same tax rate. But as it relates to income, sales tax is regressive, since it takes a larger percentage of a low-income individual's income.

What are proportional taxes?

A proportional tax is also considered a flat tax, but one that requires everyone to pay the same percentage of their income toward the tax. The United States doesn’t have many examples of proportional taxes. When people refer to taxes as being proportional (aka flat), it generally refers to the percentage of income the taxes add up to. So even though everyone in a community pays the same sales tax rate, it’s not a flat tax.

Additionally, some taxes are proportional up to only a certain point. For example, everyone pays the same rate of 6.2% (as of 2020) toward the Social Security tax, which funds the Social Security program that provides income to older individuals. But that 6.2% only applies up to a particular income level — $137,700 as of 2020. Above that income level, you no longer have to pay the tax. So if you compare two individuals with an income under $137,700, the tax is proportional. But if you compare one individual making more than $137,700 and one making less, the tax becomes regressive, as the higher-income individual is now paying a smaller percentage of their income.

What are progressive taxes?

A progressive tax requires the amount that you pay as a percentage of your income to increase as your income increases. The more you make, the more of your income you have to pay. Income taxes are the most common example of progressive taxes.

What is the difference between regressive, proportional, and progressive taxes?

The difference between regressive, proportional, and progressive taxes comes down to how the amount of tax that you pay relates to your income. In the case of regressive taxes, low-income individuals pay a higher percentage of their income toward a particular tax. For progressive taxes, high-income taxpayers usually pay a higher rate. And proportional taxes apply to everyone at the same rate of income.

How is federal income tax a progressive tax?

The United States uses a progressive tax for the federal income tax system, meaning the more taxable income you have, the greater a percentage of that income you pay in taxes. The government accomplishes this through marginal income tax rates, meaning you pay a particular percentage of taxes on the part of your income that falls within a certain tax bracket. For 2020 (meaning the taxes you’ll file by April 2021), the United States has seven tax income tax brackets with seven different tax rates:

Tax RateSingleMarried, filing jointlyMarried, filing separatelyHead of Household
10%$0 - $9,875$0 - $19,750$0 - $9,875$0 - $14,100
12%$9,876 - $40,125$19,751 - $80,250$9,876 - $40,125$14,101 - $53,700
22%$40,126 - $85,525$80,251 - $171,050$40,126 - $85,525$53,701 - $85,500
24%$85,526 - $163,300$171,051 - $326,600$85,526 - $163,300$85,501 - $163,300
32%$163,301 - $207,350$326,601 - $414,700$163,301 - $207,350$163,301 - $207,350
35%$207,351 - $518,400$414,701 - $622,050$207,351 - $311,025$207,351 - $518,400
37%Over $518,400Over $622,050Over $311,025Over $518,400

How do each of these taxes work?

Every type of tax works a bit differently. Regressive taxes are often based on the value of something that you purchase or own. The actual percentage that you pay isn’t necessarily a result of your income. With property taxes, for example, the tax amount is based on the value of your property. Your income isn’t a factor.

Unlike regressive taxes, progressive and proportional taxes are usually specifically determined by your income. When individuals and corporations file tax returns each year, they use their income for the year and the tax rates indicated by the IRS to determine the total amount they owe in taxes.

How do you calculate each type of tax?

Regressive, proportional, and progressive taxes differ pretty significantly in how you calculate them.

Regressive taxes

With regressive taxes, the percentage of income that you pay increases as your income decreases. But the dollar amount that you pay generally has nothing to do with your income.

Sales tax is an example of a flat-rate tax that is considered to be regressive, since it results in low-income individuals paying a larger portion of their income. Let’s suppose two different people go into a store to buy the same computer for $1,000, with a sales tax of 5%, or $50. Since Joe brings in a monthly income of $1,000 per month, that $50 sales tax takes up 5% of his monthly income. Jill’s monthly income is $3,000, so the $50 sales tax only takes up about 1.67% of her monthly income.

Regressive taxes hit lower-income individuals harder, but their income isn’t a factor in determining the tax. It’s not that the cashier asked Joe about his income and then charged him a higher percentage of that number in sales tax — It’s just that $50 is a greater burden for Joe than for Jill.

Proportional taxes

Proportional taxes (aka flat taxes) are a bit easier to calculate. Because everyone pays the same percentage, the only varying factor is each person’s income.

Suppose you live in a state with a proportional income tax. Colorado, for example, has a flat income tax of 4.63%. To calculate your state income tax, all you would have to do is multiply your taxable income by 4.63%. So someone with an annual income of $30,000 would pay $1,389 in state income taxes, while someone that makes $100,000 per year would pay $4,630. The amounts are different, but the percentage of each person’s income is the same.

Progressive taxes

Progressive taxes are a bit more complicated to calculate because the percentage you use is different for each taxpayer. The United States has a progressive federal income tax system, meaning those with a higher income pay a higher percentage of their income in taxes. The rate that people pay is based on tax brackets. Each tax bracket represents a particular chunk of income. Each person pays the rate corresponding to the level of income for that particular tax bracket.

What are some examples of regressive, proportional, and progressive taxes?

There are regressive, proportional, and progressive taxes in the U.S. tax system. Here are a few examples of each:

Regressive taxes:

  • Sales taxes
  • Property taxes
  • User fees

Proportional taxes:

  • Corporate taxes
  • Income taxes in Colorado and some other states

Progressive taxes:

  • Federal income taxes
  • Most state income taxes

What are the advantages and disadvantages of regressive, proportional, and progressive taxes?

There are advantages and disadvantages to each type of tax. There isn’t necessarily one type of tax that is best — The United States uses a combination of all three. Regressive taxes negatively affect low-income individuals, since they pay a disproportionately large amount of their income on taxes.

On the other hand, regressive taxes can help to create some balance with our income tax system, which is progressive at the federal level and in many states. Many people consider a progressive tax system to be the most fair solution, in the belief that those making a lot of money can afford to pay a more significant share in taxes. Though the United States doesn’t rely as heavily on proportional taxes, other people argue that federal income taxes should be proportional to make the system fairer for everyone, regardless of how much money they make.

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