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NUMBER OF BUYERS: One of the five demand determinants assumed constant when a demand curve is constructed, and that shift the demand curve when they change. The other four are income, preferences, other prices, and buyers' expectations. This determinant is based on the simple observation that if more people are willing and able to buy a good, then demand is greater.

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PROGRESSIVE TAX:

A tax in which the proportion of income paid in taxes is greater for higher income levels. A progressive income tax exists if taxpayers with more income pay a higher tax rate relative to income as income increases. A progressive tax is one of three alternations. The other two are proportional tax, in which the proportion of income paid in taxes is the same for all income levels, and regressive tax, in which the proportion of income paid in taxes is smaller for higher income levels.
While taxes are levied on a variety of tax bases (sales, property, gasoline, corporate profits), tax proportionality evaluates the proportion of income paid in the tax at alternative income levels. A progressive tax exists if higher income levels pay the a greater proportion of income in tax. Meaning that lower income levels pay a smaller proportion of income in tax.

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

Progressive taxes are favored by a sizable contingent of the population, especially those with relatively less income. Vested interest of the poor aside, a case can be made for the use of progressive taxes. However, reasonable arguments can also be made that progressive taxes are not the best.
  • 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

Progressive tax is one of three tax proportionality alternatives. The other two are proportional tax and regressive tax.
  • 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

Taxes are never far removed from politics. Few members of society actually like paying taxes. Most do so only reluctantly knowing that government provides valuable public goods. Almost everyone, though, prefers that someone else pays the taxes.

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.

With political power ebbing and flowing between conservative and political views, so too taxes ebb and flow between regressive and progressive, seldom settling on proportional.

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Recommended Citation:

PROGRESSIVE TAX, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 22, 2018].


Check Out These Related Terms...

     | tax proportionality | proportional tax | regressive tax | taxation principles | taxation basics | tax effects | revenue effect | allocation effect | tax equity | ability-to-pay principle | benefit principle | horizontal equity | vertical equity | tax efficiency | tax incidence | tax wedge | deadweight loss |


Or For A Little Background...

     | taxes | government functions | equity | distribution standards | public finance | public goods | political views |


And For Further Study...

     | political views | public choice | good types | market failures | public goods: demand | public goods: efficiency | tax multiplier | personal tax and nontax payments | transfer payments |


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