What is progressive tax?
Taxation systems differ all around the world and also within regions, with different rules applying for types of income and earnings. Progressive tax is one important form of taxation. A simple progressive tax definition is tax with a rate that increases in correlation with the taxable amount. Find out everything you need to know about progressive tax with our definitive guide. In practical terms, progressive tax means the more you earn, the higher the percentage youll pay. This is typically implemented by introducing tax brackets that categorise people into earning groups so that the highest earnings pay the highest percentage of tax. This usually only applies to income that goes over a specified amount, so everyone pays the same rate on their base income, except in cases of tax exemptions. There are different ways of implementing progressive tax structures, but they all work on a correlation between income and tax percentages. This ensures that everyones contribution is proportionate to their earnings and helps ease financial strain on those at the lower end of the earning scale while putting a greater obligation on those who can afford it. Regressive tax refers to the impact on the spenders rather than the tax itself. A regressive tax applies the exact same amount of tax in cash value, which means that a lower-earning individual loses a greater percentage of their income. This is often the case in, for example, VAT systems, where everyone pays the same amount of tax on a product irrespective of their personal earnings. Progressive vs. flat tax  Flat tax doesnt mean everyone pays the same amount of tax, but it does mean the same percentage is applied to everyone. This differs from progressive tax, which applies a higher percentage to greater incomes. Flat tax systems are applied in some areas of the United States but often have restrictions and limits in order to make them workable in practice. When it comes to progressive vs. flat tax, its also important to note that progressive tax rates are more typically found in European countries. Arguments for progressive tax  To some higher earners, progressive tax can seem like it puts them at an unfair disadvantage. However, the principle of progressive tax is that it helps to balance out inequalities in society. While a flat percentage across the board would mean that lower-end earners still pay less than higher earners, it would still make a greater impact on their spending power and would have a greater real-world effect on them than their higher-earning counterparts. Its also important to understand how tax bands work in terms of application. Typically, everyone has the same allowance for each band so that higher earners wont be disproportionately impacted. For example, everyone may pay 20% tax on their first 20,000 earned while anything above that may be charged at 30% tax. This helps mitigate any unfairness for those in higher tax bands. Its also interesting to note that progressive tax systems typically yield more taxes as theyre able to charge higher amounts at the top end. If flat rates were applied, they would have to be restricted to the amount affordable for the lower earners, even for those with additional disposable income. Progressive tax example  UK income tax is a good progressive tax example. This system allows for a personal allowance which is not taxed and then progresses through a basic rate, higher rate, and additional rate. These tax bands are applied to annual income to determine how much of each individuals income is taxed. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.