A Progressive Tax is a form of taxation in which different economic groups pay more or less depending on their income. For example, in the United States a family making up to $35,000 yearly pays a 15% income tax, while a family making up to $174,000 yearly pays a 28% income tax. The U.S. tax system is the most progressive in the world, according to studies.
One advantage of a progressive tax is that it allows higher taxation on individuals who are more able to afford it. This allows a more even spread of wealth, with the richer individuals contributing more to the welfare of the country than the poorer individuals. This increases the income to the government without placing undue burden on lower income groups.
One disadvantage of a progressive tax is that it encourages high-earners to move their assets or earnings overseas so they will not be taxed as highly. This removes money from the country, and eliminates the benefits of higher taxation.
A progressive income tax seeks to garner more funds from those who have the resources (higher incomes) to shoulder a bigger share of the tax burden. Consequently, those who earn higher incomes pay a larger percentage in taxes than do those who earn lower incomes. A progressive tax system by governments looks to garner the monies it requires to fund programs and such through not overburdening those who are low-income individuals. They pay a lower percentage on their taxable income.
This is where the structure of tax brackets enters the picture. Income earners are set into groups. These brackets can and do change, and they can change at the whim of a government, especially when it comes to formulating a budget, or to gain political capital in an election year.
In Canada here, the Income Tax Brackets for this calendar year 2015 are 15 percent on the first $44,701 of taxable income;22 percent on the next $44,702 of taxable income; 26 percent on the next $89,402 of taxable income, and 29 percent of taxable income that is greater than $138,586.
One advantage of a progressive income tax is that those who can pay more do. Low-income earners do not pay the same percentage as higher income earners as this would only bury them deeper in any financial distress/debt they are experiencing. A progressive tax system is a way for governments to bring in the funds needed each year, without causing one segment of the population undue hardship, although, in today’s climate of economic uncertainty, low-income earners still often struggle to make ends meet.
One disadvantage of a progressive tax system is that those who are creative and innovative, risk-takers, productive, and who work hard to make good money, are, in effect, punished somewhat for their success as their incomes grow. The more they earn, the more they will have to give to the government, as prescribed by the aforementioned tax brackets.
Therefore, higher-income earners look for ways to bring their taxable income down so that they pay less taxes. They do this in legal ways. Some also do it in illegal ways, operating ‘under the table’ so-to-speak in order to hide income from the government and this is a disadvantage of the progressive tax system as it sometimes encourages a hidden, underground economy, and this is certainly a fact of life in nations globally.