Legal Definitions - graduated tax

A graduated tax is a tax system where the tax rate increases as the taxable amount or value increases. This means that individuals or entities with higher incomes, greater wealth, or more valuable assets pay a larger percentage of their income or assets in taxes, not just a larger absolute amount.

Here are some examples to illustrate how a graduated tax works:

• Federal Income Tax: In the United States, the federal income tax system is a prime example of a graduated tax. For instance, an individual earning $50,000 might pay 10% on the first portion of their income, 12% on the next portion, and so on, with the highest earners paying a higher percentage of their income overall. Someone earning $500,000 would pay a significantly higher percentage of their total income in taxes compared to the person earning $50,000, because larger portions of their income fall into higher tax brackets with progressively higher rates.

  This illustrates a graduated tax because the percentage of income paid in taxes rises as an individual's total income increases.

• State Estate Tax: Some states impose an estate tax, which is a tax on the value of a deceased person's property before it is distributed to heirs. A state might have a system where estates valued up to $1 million are taxed at 5%, estates between $1 million and $5 million are taxed at 10%, and estates over $5 million are taxed at 15%. An estate worth $7 million would therefore pay a higher percentage of its total value in taxes than an estate worth $800,000.

  This demonstrates a graduated tax because the tax rate applied to the estate's value increases as the total value of the estate grows.

• Capital Gains Tax (Hypothetical State System): Imagine a state that implements a graduated capital gains tax. This tax applies to profits from the sale of assets like stocks or real estate. Under this system, profits up to $10,000 might be taxed at 5%, profits between $10,001 and $50,000 at 8%, and profits above $50,000 at 12%. A person who sells an investment for a $75,000 profit would pay a higher overall percentage of that profit in taxes than someone who made a $5,000 profit.

  This shows a graduated tax because the tax rate applied to the capital gain increases as the amount of profit realized from the sale of an asset increases.