Suppose, for example, that someone like Winston Smythe Kennsington III earns $10 million of income and pays $2 million in income taxes (20 percent) and that Pollyanna Pumpernickel earns $10,000 in taxes and pays $1,000 in income taxes (10 percent). Because Winston pays a greater proportion of income in taxes than Pollyanna, the income tax is progressive.

The same notion applies to other types of taxes. If Winston pays $200,000 in property taxes over the course of year on his assorted estates around the country (2 percent of his $10 million income) and Pollyanna pays only $100 in property taxes for a year of her humble house (1 percent of her $10,000 income), then property taxes are also progressive.

Progressive tax is one of three tax proportionality alternatives. Something of a polar opposite, regressive tax is then one in which a smaller proportion of income is paid in tax for higher income levels. In this case, the tax rate effectively decreases with income. A proportional tax is then one in which a the same proportion of income is paid in tax for regardless of income levels. That is, the tax rate effectively remains constant with respect to income.

The Pros and Cons of Progressive

• Rich Pay More: One consideration, from an ability-to-pay perspective, is that people actually have a greater ability to pay with increases in income. This occurs because a smaller proportion of income is spent on necessities, such as food, housing, and energy, for those with more income. The wealthier thus have more discretionary income and can better afford to finance government operations. Theoretically, it can be said that marginal utility of income decreases at higher income levels, meaning that $1 to a wealthy person is less valuable than $1 to a poor person. The rich, as such, suffer less when bearing a disproportionally greater tax burden.


• Rich Pay Less: On the other side of tax progressivity, from an investment and economic growth perspective, those with more income are also more likely to invest in capital goods. The production and provision of capital goods creates jobs and provides income for others. The resulting economic growth then benefits all members of society. If the wealthy pay a disproportionally higher tax rate, then they have less income to invest.

Proportional and Regressive

• Proportional: A proportional tax is one in which the proportion of income paid in taxes is the same for all income levels. A proportional income tax exists, for example, if ever taxpayer pays exactly the same proportion of their income in taxes, that is, the same tax rate. Suppose that Winston Smythe Kennsington III earns $10 million of income and pays $1 million in income taxes (10 percent) and that Pollyanna Pumpernickel earns $10,000 in taxes and pays $1,000 in income taxes (also 10 percent). Because Winston and Pollyanna both pay 10 percent of their incomes in taxes, the income tax is proportional.


• Regressive: A regressive tax is one in which the proportion of income paid in taxes is smaller for higher income levels. A regressive income tax exists, for example, if taxpayers with more income pay a smaller proportion in taxes, that is, a lower tax rate. Suppose that Winston Smythe Kennsington III earns $10 million of income and pays $1 million in income taxes (10 percent) and that Pollyanna Pumpernickel earns $10,000 in taxes and pays $2,000 in income taxes (20 percent). Because Winston pays a smaller proportion of income in taxes than Pollyanna, the income tax is regressive.

The Politics of Proportionality

As such, while the use of proportional taxes would seem to be a fair and reasonable approach to generating the funds needed for government operations, most taxes end up being either regressive or progressive. Those on the upper end of the income spectrum tend to prefer regressive taxes and those on the lower end tend to prefer progressive taxes.

To the extent that people with conservative political leanings also occupy the upper end of the spectrum, they also tend to favor more regressive taxes, while opposing more progressive taxes. To the extent that people with liberal political leanings also occupy the lower end of the spectrum, they also tend to favor more progressive taxes, while opposing more regressive taxes.