What is a progressive tax system?

A progressive tax system is simple yet misunderstood. In progressive tax systems, the more you earn, the larger portion of your income you’re expected to pay in taxes. That’s what we have here in the United States as your taxable income gets larger, so does the marginal tax rate that applies to your income.

The easiest way to understand how the progressive tax system works is by looking at the federal income tax brackets. The 2021 tax brackets are pretty much identical to the prior-year tax brackets – with only the amounts for each bracket changed. Depending on what portion of your income is subject to taxes, you can pay between 10 percent and 37 percent of your income in taxes. However, you won’t pay just a set percentage of your taxable income in taxes. You will only pay the highest rate for the taxable income that places you in the bracket.

Here is an example to better understand this:

You will pay 10 percent of income for the first bracket.

You will pay 12 percent of income for the taxable income starting from the 12 percent bracket to your taxable income or higher if your taxable income is more.

You will pay 22 percent of income for the taxable income tarting from the 22 percent bracket to your taxable income of higher if your taxable income is more, and so on.

In the United States tax code, there are seven different tax rates that can apply to a taxpayer’s income: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. If there were to be additional tax brackets that were higher than 37 percent, taxpayers that are under won’t be affected. So only those who are earning significantly more than the median income, for example, up to $3 million would be affected with additional brackets.

The bottom line is in progressive tax systems, the more you earn, the more you are taxed whereas in regressive tax systems, the more you earn, the less you are taxed which seems unfair. The unfairness is one of the reasons why not many countries have adopted regressive tax systems.

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