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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. Many believe progressive taxation is necessary to prevent an oligarchy from usurping a social democracy.
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 plebeian class as an attempt at bribery (2:9).
Straight progression[edit]
A simple progressive income tax scale could be delineated as follows:
| 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 |
A progressive tax code similar to this was used in the United States, which actually taxed the top tax bracket (i.e. the richest people) over 90% until the 1960s.[citation needed] However, a straight progressive tax like this (as opposed to tax brackets - see below) actually can defeat its own purpose, because it can be 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. Although, someone who makes 19,000 has to spend most of their earnings on just living, and has less of it to spend on luxuries or to invest, and also loses a large portion of it to taxes. But someone making as much as a million a year would have plenty of money left over to spend and invest, even after paying taxes. 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.
Tax brackets[edit]
Instead, governments that impose income 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. A progressive tax is necessary to prevent an oligarchy type of government to usurp a social democracy. In addition, owed tax calculation occurs after any deductions (such as exemptions for kids/elderly parents, 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.
Why it's still kind of unfair[edit]
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 only NOT progressive, but also capped at a dollar amount maximum, meaning that, for individuals with income exceeding the maximum, higher income results in lower percentage (self) employment tax.
Let's not even get into the problems that happen when those on top manage to find tax loopholes. That causes way too many problems to discuss. Or that the cost of basic needs are equal for all income levels, leaving more to reinvest and make a profit on. Even in lieu of the convoluted loopholes, the very capitalist nature of United States ideology, which favors private-sector investment as economic growth driver, simply has no (self) employment tax on passive income such as interest, dividends and capital gain, which comprise a significant portion for those born into affluent households.