Legal Definitions - progressive tax

A progressive tax is a tax system where the tax rate increases as the taxable amount or income of an individual or entity rises. This means that those with higher incomes or greater wealth pay a larger percentage of their income or assets in taxes compared to those with lower incomes or less wealth. The underlying principle is often based on the idea that those who can afford to pay more should contribute a greater proportion of their resources to public services.

• Example 1: Federal Income Tax Brackets

  Imagine a country's federal income tax system that uses multiple tax brackets. For instance, income up to $50,000 might be taxed at 10%, income between $50,001 and $100,000 at 20%, and income above $100,000 at 30%. A person earning $40,000 would pay 10% of their income in taxes. A person earning $70,000 would pay 10% on the first $50,000 and 20% on the next $20,000, resulting in a higher overall percentage of their total income paid in taxes than the first person. Someone earning $150,000 would pay an even higher overall percentage of their income in taxes.

  This illustrates a progressive tax because as an individual's income increases, the percentage of their income that is subject to taxation also rises through the different tax brackets, meaning higher earners pay a larger proportion of their earnings.

• Example 2: Estate Tax on Inherited Wealth

  Consider a hypothetical estate tax, which is a tax levied on the total value of a person's assets after their death, before distribution to heirs. Such a tax might be structured progressively: estates valued up to $1 million are taxed at 5%, estates between $1 million and $5 million are taxed at 10%, and estates valued over $5 million are taxed at 15%. An estate worth $800,000 would pay 5% in tax. However, an estate worth $3 million would pay 5% on the first $1 million and 10% on the remaining $2 million, leading to a higher effective tax rate on the total value of the estate compared to the smaller estate. A $10 million estate would face an even higher overall percentage.

  This system is progressive because the tax rate applied to the estate's value increases as the total value of the estate grows, meaning larger inheritances contribute a greater proportion of their value in taxes.