The progressive tax system is widely used around the world. It is based on the idea that the more taxable income or profit an individual makes the higher the rate of tax they should pay. The way this system should work is that those who earn the least amount of money should have to pay the least amount of tax – they will pay a lower percentage of tax on their income than the high earners. It is viewed as fair system by many but there are also critics who believe that taxing the rich too much stifles the economy.
How Progressive Tax Works in Practice
To say that the percentage of tax you pay is determined by the amount you earn can mislead people. Although an individual who earns $60,000 will pay a higher tax rate than somebody who earns $20,000 they will not pay this higher rate for the full $60,000.
So let’s imagine that the individual who earns $20,000 will pay tax at a rate of 10%. The individual who earns $60,000 might pay 10% for the first $20,000 of their money, 15% on their earnings from $20,000 to $40,000, and 20% on all the money they earn above $40,000. As you can see here then they will not be paying the 20% rate for all their income; only the amount over $40,000. Working out the tax that people need to pay can be a bit complicated if you are not good with mathematics. Here the individual earning $20,000 would pay $2,000 while the person earning $60,000 would pay $9,000.
The above examples only give an idea of how things work in practice. In reality things can be a lot more complicated. People will be able to reduce their tax bill due to different available deductions. They will also pay a lot of tax on taxable goods. In fact, over the course of a year the individual may pay a lot more in sales tax then they have paid in income tax.
The Arguments for and Against Progressive Tax
There is a lot of support for a progressive tax system because it is considered fair. Those individuals who earn more money should be expected to give more back to society. Those who are less well off just can’t afford to pay a lot of tax so they shouldn’t be expected to. It is in everyone’s interest to prevent poverty and hardship within a society. This isn’t only for moral reasons but also for practical ones too. When poverty is high it leads to increasing crime and social unrest.
Other people argue that those who earn more money should pay a lower rate of tax. This would still mean that they would be pay more tax than the average person, but considerably less than they are now. This type of system is viewed as fairer to the rich who can pay huge sums of money each year in tax. It is argued that by allowing these people to pay less tax they will be more productive and this will be better for the economy.