Tax systems in the U.S. fall into three main categories: Regressive, proportional, and progressive. Regressive and progressive taxes impact high- and low-income earners differently, whereas proportional taxes do not. Property taxes are an example of a regressive tax; the U.S. federal income tax is a progressive tax example; and occupational taxes are a type of proportional tax.
Regressive taxes have a greater impact on lower-income individuals than on the wealthy. A proportional tax, also called a flat tax, affects low-, middle-, and high-income earners relatively equally. They all pay the same tax rate, regardless of income.
A progressive tax has more of a financial impact on higher-income individuals than on low-income earners, with tax rates and tax liability increasing in line with a taxpayer’s income. Investment income and estate taxes are examples of progressive taxes in the U.S.
- A regressive tax system levies the same percentage on products or goods purchased regardless of the buyer’s income and is thought to be disproportionately burdensome on low earners.
- A proportional tax applies the same tax rate to all individuals regardless of income.
- A progressive tax imposes a greater percentage of taxation on higher income levels, operating on the theory that high-income earners can afford to pay more.
Low-income individuals pay a higher amount of taxes compared to high-income earners under a regressive tax system. That’s because the government assesses tax as a percentage of the asset’s value that a taxpayer purchases or owns. This type of tax does not correlate with an individual’s earnings or income level.
Regressive taxes include property taxes, sales taxes on goods, and excise taxes on consumables, such as gasoline or airfare. Excise taxes are fixed and included in the price of the product or service.
Sin taxes, a subset of excise taxes, are imposed on commodities or activities perceived to be unhealthy or negatively affect society, such as cigarettes, gambling, and alcohol. They’re levied in an effort to deter individuals from purchasing these products. Sin tax critics argue that these disproportionately affect those who are less well off.
Many also consider Social Security to be a regressive tax. Social Security tax obligations are capped at a certain level of income called a wage base—$160,200 in 2023. An individual’s earnings above this base are not subject to the 6.2% Social Security tax.
The annual maximum you can pay in Social Security tax is capped at $9,932.00 in 2023, whether you earn $160,200 or $1 million. Employers pay an additional 6.2% on behalf of their workers, and self-employed individuals must pay both halves on earnings up to the wage base.
Higher-income employees effectively pay a lower proportion of their overall pay into the Social Security system than lower-income employees. This is because it’s a flat rate for everyone, and the cap limits how much income an individual is taxed regardless of income.
Just as Social Security can be considered a regressive tax, it’s also a proportional tax because everyone pays the same rate, at least up to the wage base.
A proportional or flat tax system assesses the same tax rate for everyone regardless of income or wealth. This system is meant to create equality between marginal tax rates and average tax rates paid. Eleven states use this income tax system as of 2023: Arizona, Colorado, Idaho, Illinois, Indiana, Kentucky, Michigan, Mississippi, North Carolina, Pennsylvania, and Utah.
Other examples of proportional taxes include per capita taxes, gross receipts taxes, and occupational taxes.
Proponents of proportional taxes believe they stimulate the economy by encouraging people to work more because there is no tax penalty for earning more. They also believe businesses are likely to spend and invest more under a flat tax system, putting more dollars into the economy.
Taxes assessed under a progressive system follow an accelerating schedule, so high-income earners pay more than low-income earners. Tax rates and tax liabilities increase with an individual’s wealth. The goal of a progressive tax is to make higher earners pay a larger percentage of taxes than lower-income earners.
Federal Income Tax
The U.S. federal income tax is a progressive tax system. Its schedule of marginal tax rates imposes a higher income tax rate on people with higher incomes and a lower income tax rate on people with lower incomes. The percentage rate increases at intervals as taxable income increases. Each dollar the individual earns places them into a bracket or category, resulting in a higher tax rate once earnings meet a new threshold.
Standard deduction and itemized deductions allow individuals to avoid paying taxes on a portion of the income they earn each year. The amount of the standard deduction changes from year to year to keep pace with inflation.
Progressive Tax Criticisms
Progressive tax rates have critics. Some say progressive taxation is a form of inequality, with higher earners paying more to support lower-income earners. The marginal tax rates for an individual range from 10% to 37% in 2023, with the wealthiest Americans subject to the highest rate. Others argue that the tax code benefits wealthy individuals who can avoid income tax through tax breaks.
In 2022, 40.1% of U.S. citizens did not pay income taxes because they did not earn enough to reach the lowest tax rate, according to the Tax Policy Center. Conversely, a 2021 study by White House economists concluded that the 400 wealthiest U.S. families paid an average income tax rate of less than the lowest tax bracket (8.2%) from 2010 to 2018, despite high marginal tax rates.
Estate taxes are another example of progressive taxes as they mainly affect high-net-worth individuals (HNWIs), and they increase with the size of the estate. Only estates valued at $12.92 million or more are liable for federal estate taxes in 2023.
Examples of Regressive, Proportional, and Progressive Taxes
The following examples of regressive, proportional, and progressive taxes show how they work in practice:
Regressive Tax Example
If shoppers pay a 6% sales tax on their groceries, whether they earn $30,000 or $130,000 annually, those with lesser incomes pay a greater portion of total income than those who earn more. If someone makes $20,000 a year and pays $1,000 in sales taxes on consumer goods, 5% of their annual income goes to sales tax. But if they earn $100,000 a year and pay the same $1,000 in sales taxes, this represents only 1% of their income.
Proportional Tax Example
Under a proportional income-tax system, individual taxpayers pay a set percentage of annual income regardless of how much they earn. The fixed rate doesn’t increase or decrease as income rises or falls. Someone who earns $25,000 annually would pay $1,250 at a 5% rate, whereas someone who earns $250,000 each year would pay $12,500 at that same rate.
Progressive Tax Example
In the U.S., income taxes operate under a progressive system. In 2023, federal progressive tax rates range from 10% to 37%. For a single taxpayer, the marginal rate of taxation is:
- 37% for incomes over $578,125
- 35% for incomes over $231,250
- 32% for incomes over $182,100
- 24% for incomes over $95,375
- 22% for incomes over $44,725
- 12% for incomes over $11,000
The tax rates are applied progressively from 10% to 37%. A single taxpayer with a taxable income of $50,000 in 2023 does not pay the full 22% rate for their income. Instead, they pay 10% on the first $11,000 of income, 12% on income from $11,001 to $44,724, and 22% for the amount over $44,725. This earner’s effective tax rate is 12%.
Are Income Taxes Progressive Taxes?Income taxes can be both progressive and proportional. Progressive taxes impose low tax rates on low-income earners and higher rates on those with higher incomes, while individuals are charged the same tax rate regardless of how much income they earn.
Is the Federal Income Tax Proportional?No, the federal income tax in the United States is progressive.
Are Regressive Taxes Fair?Regressive taxes may seem fair because they are imposed on everyone regardless of income, but they hurt low-income earners more than others. That’s because they spend a larger portion of their income on regressive taxes than people who earn more.
What Taxes Are Considered Regressive?Regressive taxes are those that are paid regardless of income, such as sales taxes, sin taxes, and property taxes.
How Do You Calculate Progressive Tax?Progressive tax systems don’t charge taxpayers a flat rate. Instead, the percentage you owe increases as your income gets higher. In the U.S., the marginal tax rates are set by the IRS. Here’s how you would calculate your income tax burden in 2023: If you are filing as a single taxpayer, you pay 10% on the first $11,000 of income, 12% on any earnings between $11,001 and $44,725, 22% up until $95,375, and so on. The thresholds are different for married couples filing jointly. The highest tax rate of 37% only affects income higher than $578,125 (or $693,750 for married couples filing jointly).
The Bottom Line
Paying taxes is inevitable. But how much of an impact they have depends on the tax system used and how much you make. Regressive taxes—sales taxes, property taxes, and sin taxes—and proportional taxes have a greater impact on low earners because they spend more of their income on taxation than other taxpayers. But progressive taxes—the federal tax system used in the United States—usually impact high-income earners more than anyone else.
Taxes & Government Revenue
Collecting taxes and fees is a fundamental way for countries to generate public revenues that make it possible to finance investments in human capital, infrastructure, and the provision of services for citizens and businesses.
Preliminary analyses estimate the financing gap for achieving the Sustainable Development Goals for developing countries at about $2.5 trillion annually. Much of this financing gap will need to be met by increased private-sector investment in sustainability, which requires appropriate tax policies to create the needed price incentives. Yet, developing countries that are most in need of revenues, including fragile and conflict-affected states (FCS), often face the steepest challenges in collecting taxes.