Do you know what is the meaning of a progressive tax? The system is progressive when an individual’s taxable income is linked to an increase in the tax rate. People who can manage the cost better contribute a higher percentage of their pay in charges than those with lower livelihoods.
The objectives of progressive taxation are to:
- Finance public services
- Enhance economic equality
L&Y Tax Advisor explains what is the meaning of a progressive tax, its key features, and if it is workable in your favor.
How Does a Progressive Tax Work?
Under a progressive tax system, tax rates are arranged in brackets. Each bracket corresponds to a certain income range. As income increases, taxpayers enter higher tax brackets and pay higher rates on the portions of their income that fall into each bracket.
Be mindful that not all income is taxed at a higher rate. Only the portion that exceeds the threshold of the preceding bracket is taxed at the higher rate.
For example, if a country has the following tax brackets:
- 10% for income up to $20,000
- 15% for income between $20,001 and $40,000
- 25% for income above $40,001
A $50,000 income would not be subject to a 25% tax on the earned amount. Instead, a 10% tax would be applied to the first $20,000, 15% to the following $20,000, and 25% to the last $10,000.
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Key Features of Progressive Taxation
The following are some fundamental features of a progressive tax:
Income Redistribution
The progressive tax system requires high-income people to pay a bigger proportion of their income in taxes to redistribute wealth. This contributes to funding government initiatives that improve society and close the income gap.
Equity in Taxation
Because this tax system is equal, people are taxed based on their financial situation. Higher earnings contribute more to the tax burden, while lower earners pay less.
Read: What is a VAT number in the US?
Diminishing Economic Inequality
Progressive taxation lessens the gap between the rich and the poor. They impose more taxes on those with higher incomes. Usually, the money raised goes toward funding public services like:
- Infrastructure
- Healthcare
- Education
The Bottom Line
Comprehending what is the meaning of a progressive tax is an equitable method. People with higher earnings pay a larger share of the taxes collected by the government. This method contributes to the financing of vital public services and the reduction of economic inequalities. It promotes higher social welfare by adhering to the idea that taxes should be determined by an individual’s capacity to pay.
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