Progressive taxation

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Progressive taxation is the policy of taxing people who earn greater amounts of money in greater proportions, such that the rich pay taxes at a higher rate. During the 2008 Presidential Election, John McCain, Sarah Palin, and Joe the Plumber tried to argue that progressive taxation equated with that old communist maxim, "from each according to his ability, to each according to his need." But although progressive taxation is often a part of a communist or socialist program, it is not exclusively a socialist idea, and is also advocated by many non-socialist political groups.

Progressive taxation has a long history in the western world: in his Early History of Rome, Livy described approvingly the early Roman monarch Servius Tullius' attempt to impose a progressive tax system in the levying of armies (1:42), but later read the utter (though temporary) elimination of any taxation on the plebian class as an attempt at bribery (2:9).

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[edit] Straight progression

A simple progressive income tax scale could be delineated as such:

Income range Tax rate Example income Tax owed Net income
0 - 10,000 0% 5,000 0 5,000
10,001 - 20,000 10% 15,000 1,500 13,500
20,001 - 50,000 20% 35,000 7,000 28,000
50,001 - 100,000 30% 75,000 22,500 52,500
100,001 - 200,000 40% 150,000 60,000 90,000
200,001 - up 50% 500,000 250,000 250,000

If any government instituted such a scale, however, there would be revolution in the streets from both the wealthy and the poor. It's not just illogical, it's also unfair; for example, someone who makes 19,000 would only pay 1,900 in taxes, keeping 17,100 for themselves, whereas someone who makes 21,000 would pay 4,200 in taxes, only keeping 16,800 and thus netting less than the person who makes 19,000. However, those who rail against taxes (in both the government and in public life) often think or state that this is exactly how the tax code works. Songs like "Taxman" by the Beatles probably don't help either.

[edit] Tax brackets

Instead, governments that impose taxes use a bracket system, meaning only the portion of income not taxed by the lower rate is taxed at a higher rate. This removes the unfair aspect of a simple progressive tax. Thus, our example from above would look like this:

Income range Tax rate Example income Tax owed Net income
0 - 10,000 0% 5,000 0 5,000
10,001 - 20,000 10% 15,000 (15,000 - 10,000) * 10% = 500 14,500
20,001 - 50,000 20% 35,000 (20,000 - 10,000) * 10% + (35,000 - 20,000) * 20% = 4,000 31,000
50,001 - 100,000 30% 75,000 (20,000 - 10,000) * 10% + (50,000 - 20,000) * 20% + (75,000 - 50,000) * 30% = 14,500 61,500
100,001 - 200,000 40% 150,000 (20,000 - 10,000) * 10% + (50,000 - 20,000) * 20% + (100,000 - 50,000) * 30% + (150,000 - 100,000) * 40% = 42,000 108,000
200,001 - up 50% 500,000 (20,000 - 10,000) * 10% + (50,000 - 20,000) * 20% + (100,000 - 50,000) * 30% + (200,000 - 100,000) * 40% + (500,000 - 200,000) * 50% = 212,000 288,000

Taking our example from above, the individual earning 19,000 only pays 900 (netting 18,100), and the individual earning 21,000 only pays 1,200 (netting 19,800).

Please note this is NOT an actual tax bracket for any known government and should NOT be used for tax purposes. The United States tax rates are actually much lower than this, so be thankful for that. In addition, owed tax calculation occurs after any deductions (such as exemptions for kids, business or asset losses, taxes already paid on properties, etc.) have occurred; someone with a spouse, two kids and a mortgage who makes $80,000 a year is likely to be taxed even on simple tax forms based on their taxable income of significantly less than that—probably closer to $65,000. Likewise, another person who makes $80,000 but has no kids or spouse is likely to be better off financially, will have fewer deductions and have a higher taxable income.

[edit] Why it's still kind of unfair

Anti-communist rhetoric aside, none of the numbers in the example above have any context as far as what currency is used or what the cost of living is. If the poverty line for the hypothetical government entity described above was 10,000, then the poor would be in a pretty good place (assuming social programs are there to meet the rest of their needs). If the poverty line was 25,000, then the taxes paid by those living below it would sting much more greatly than the taxes paid by those who live significantly above the poverty line.

Furthermore, the tax brackets do not take into account the ranges of income for a given population. In any capitalist society, you expect to see a "pyramid" of income earners, with there being more people at the lower range of income and only a few people at the highest range of income. Thus, even though the wealthy pay higher taxes individually, the tax burden is largely placed on those at the bottom. In the United States, the bottom tax bracket is low enough that a large portion of wage earners do not pay income taxes; however, their earnings are still taxed through the purchases they make, and they still have to pay into "entitlement programs" such as Medicare and Social Security, which are NOT progressive taxes in that they are capped at some personal maximum limit.

[edit] See also

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