You have probably heard the saying “nothing is certain in this life, except death and taxes”. The statement certainly has truth attached to it.

In this day and age, taxes are a fact of life and are a necessary part of a functioning economy. Without taxes governments are unable to be run.

If there were no taxes then:

  • Employees would not be able to be hired for public programs.
  • Infrastructure such as water systems, roads, public transportation and parks would not be built or well maintained.
  • Programs such as Social Security, Medicare, and Medicaid would not be possible

The type of taxation system that the United States, and many other countries also utilize is called a progressive tax system.

What is a Progressive Tax System?

A progressive tax system is a method of taxation, where the amount of tax paid by the income earner is determined by the level of your income.

As a general rule, your tax rate increases as your income increases. This results in high income and high net worth individuals being taxed a larger amount overall. The higher taxes can also come in the form of other taxes such as a luxury tax or an estate tax.

These types of taxes are levied on luxury goods such as luxury cars and jewellery.

What are the Advantages of A Progressive Tax System?

Equality of Income - A progressive tax system acts as a mechanism for redistributing wealth from the wealthy to lower and middle-income households. This in turn keeps the gap between the wealthy and poor from widening.

Social Justice - Some people have the view that people with higher incomes should pay more taxes, and those who earn little should receive assistance from the government. For people who hold this viewpoint, a progressive tax system helps to achieve this.

Increased Government Revenue - A progressive tax system allows a government to collect a larger overall total of tax revenue from high-income earners, when compared to a flat tax rate. This higher amount of government revenue can then be used for more public services that will benefit the community as a whole.

What are the Disadvantages of A Progressive Tax System?

Resentment between Socioeconomic Classes

A progressive tax system can create tension between socioeconomic classes due to the difference in their interests and priorities. Wealthy individuals who work 60 hour weeks and have high salaries, might resent paying higher taxes to fund welfare programs of individuals who they think are not trying hard enough to improve their situation.

Conversely, lower income individuals might feel that wealthier individuals are looking out for their own self-interests and don’t understand the plight of the working class. Therefore, removing a progressive tax system would be viewed as unfair to them.

Penalizes Those That Work Harder

There is an argument that progressive taxes are unfair to those who work hard to achieve a higher income. If higher income individuals are taxed and their funds are redistributed to the lower income individuals, this will remove incentive for lower skilled workers to improve themselves and become more valuable workers.

It also removes the incentive for high-income workers to be productive, since they are punished for their hard work with higher taxes.

In turn, the economy becomes less productive overall, since workers remain unskilled.

Tax Avoidance and Hiding Assets

If tax rates are much higher in one country, in comparison to a low tax jurisdiction, this might lead to wealthy individuals undergoing tax-planning strategies to hide assets in offshore accounts to reduce tax. This would reduce the amount of tax that a country could collect.

Taxation is a complicated topic, with varying viewpoints. While a progressive tax system has its flaws, it also allows a greater overall benefit to society.


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