In every country, income tax is an integral part of government's financial policies. The money raised from the income tax is used for growth and development of that country. Income taxes are generally of two types; regressive and progressive.
In regressive taxes, tax is only levied on a smaller percentage of the income, but in progressive / graduated income tax, the tax is charged with increase in income every year. If you're still left wondering about progressive or graduated taxes, then keep reading.
What is a Graduated Income Tax
Let us understand this tax system by considering an example. An individual earns $85,000 per year. Taxes levied on his income, if progressive tax law applies, will be, for the first US$10,000, 5%. For next income bracket, say US$25,000, the tax rate can be 10% and for next US$50,000, the tax rate can be 15%.
As the income becomes higher, the tax rate will increase correspondingly. In case, someone is earning, say US$20,000 per year, the income tax charged will be at 5% for 1st US$10,000 and 10% for remaining amount of US$10,000.
Current Tax Rates
As per the Federal tax 2010, the income tax bracket is divided into 6 parts for every category of filer (married filing jointly and widowers, married filing separately, single and head of household): 10%, 15%, 25%, 28%, 33% and 35%. Depending on the wealth or income, the tax rate is applied by the government. In 2010, for a married filing jointly, the tax rates depending on wealth was as follows:
|Income Range||Tax Rate|
|Up to $16,750||10%|
|Over $16,750 but not over $68,000||15%|
|Over $68,000 but not over $137,300||25%|
|Over $137,300 but not over $209,250||28%|
|Over $209,250 but not over $373,650||33%|
In case, a couple is earning, say US$15,000, the income tax rates applicable will be 10% on the whole amount, as it is still less than the maximum income tax threshold for that income range. But for a couple who will earn US$50,000, the income tax charged will be 10% on first US$16,750 and 15% for the remaining amount. The table above makes everything extremely simple to understand.
History of Graduated Income Tax
It was in the year 1862 that the government passed the nation's first income tax laws. It was this law from which the modern-day income tax laws and rules have been devised to quite a large extent. In those times of Civil war, a person earning anywhere between US$600 to US$10,000 was charged income tax at the rate of 3%. Individuals with an income higher than US$10,000 had to pay income tax at a higher rate.
Pros and Cons of Graduated Income Tax
There are two schools of thoughts when it comes to graduated income tax. People who are supporters of graduated tax are of the view that, people who earn more must pay a larger sum of money to the government as they're more privileged in society.
Those who regard progressive taxes fair, explain that if the cost of living in a city is, say suppose US$10,000 and an individual is earning only US$12,000 he may have no liberty to spend some extra money, or to pay as taxes. However, if someone in the same city is earning US$50,000, he has large amount of discretionary money and there is no harm, if some amount from the discretionary money is given to the government.
People who oppose the progressive tax argue that, it lays unnecessary burden on higher income group individuals. With increase in income if the income tax keeps increasing, a person will rarely be able to increase his productivity; so say the anti graduated income tax people. They stand in unison against such tax measures by saying that it is completely unfair on the part of government to charge the higher income group, and keep less bars on lower income individuals.
The controversial history of the graduated income tax has always been a topic of discussion amongst scholars. Be it Karl Marx, Adam Smith or present day economists and sociologists, there can be no end to the ongoing debate of idealistic tax laws. But it is a fact that progressive tax laws have been an integral part of many democracies, and is here to stay.