The overall federal tax system is progressive, with total federal tax burdens a larger percentage of income for higher-income households than for lower-income households.
Not all taxes within the federal system are equally progressive and some federal taxes are regressive, as they make up a larger percentage of income for lower-income than for higher-income households.
The individual and corporate income taxes and the estate tax are progressive. By contrast, excise taxes are regressive and payroll taxes for Social Security and Medicare are regressive at the top of the income distribution (see figure 2).
Individual income tax
The individual income tax is progressive, thanks to the impact of refundable credits for lower-income households (average tax rates are negative for the two lowest income quintiles), the standard deduction (which exempts a minimum level of income from the tax), and a graduated rate structure (rates on ordinary income rise from 10 to 37 percent, with an additional 3.8 percent marginal tax on certain investment income of high-income households). Various tax preferences, including those for capital gains, retirement saving, and home mortgage interest, make the income tax less progressive than it would otherwise be.
Corporate income tax
The corporate income tax is progressive because most of its burden falls on income from dividends, capital gains, and other forms of capital income disproportionately received by high-income households.
ESTATE TAX
The estate tax is only imposed on households with high levels of wealth. Only wealth above an exemption amount is subject to the tax—that amount for those who die in 2023 is $12.92 million, and it is effectively double that amount for married couples. High wealth is almost always commensurate with high income, so, when households are classified by income, virtually the entire estate tax burden falls on the very highest income households.
PAYROLL TAXES
The regressive nature of payroll taxes stems from two factors. First, the Social Security portion of payroll taxes is subject to a cap: in 2023, individuals will pay the tax on only their first $160,200 in earnings. Second, compared with lower-income households, higher-income households receive more of their income from sources other than wages, such as capital gains and dividends, which are not subject to the payroll tax. However, because wages rise as a share of income over the first four quintiles of the distribution, payroll taxes are slightly progressive until high income levels are reached.
Excise taxes
An excise tax increases the price of the taxed good or service relative to the prices of other goods and services. Households that consume more of the taxed good or service as a share of their total consumption face more of the tax burden from this change in relative prices All consumption taxes, including selective excise taxes also effectively exempt the normal return to capital, which is received mostly by upper income households.. The regressivity of most current federal excise taxes results from both the exemption of normal returns to capital and of the relative price effect, because, on average, major taxed goods, such as alcohol and tobacco products, represent a declining share of consumption as household income rises.
Updated January 2024
FAQs
The Overall Federal Tax System Is Progressive
Are federal taxes generally progressive? ›
Progressive taxes are when the tax rate you pay increases as your taxable income rises. The US federal income tax is progressive, with tax brackets ranging from 10% to 37%.
Are federal income taxes progressive? ›
The U.S. has a progressive income tax system that taxes higher-income individuals more heavily than lower-income individuals. Though the top 1 percent of taxpayers earn 19.7 percent of total adjusted gross income, they pay 37.3 percent of all income taxes.
What is a progressive tax answers? ›
A progressive tax takes a larger percentage of income from high-income groups than from low-income groups and is based on the concept of ability to pay. A progressive tax system might, for example, tax low-income taxpayers at 10 percent, middle-income taxpayers at 15 percent and high-income taxpayers at 30 percent.
Are state taxes more progressive than federal taxes? ›
The vast majority of state and local tax systems are regressive, costing lower-income workers more of their income than wealthier residents. Although top earners contribute more total dollars, lower-income individuals pay a higher share of their income due to sales taxes, which are regressive.
Why is federal tax progressive? ›
Progressive taxes exist so that the burden of paying for government services, oversight, and infrastructure doesn't fall disproportionately on those earning lower incomes. With a progressive tax system, those who earn less are taxed less.
Which taxes is most likely to be progressive? ›
A progressive tax has more of a financial impact on higher-income individuals than on low-income earners, with tax rates and tax liability increasing in line with a taxpayer's income. Investment income and estate taxes are examples of progressive taxes in the U.S.
Why is progressive tax the best? ›
Progressive taxes take more from those able to pay more. Because this method is based on the ability to pay, it is considered the fairest means of taxation. People with higher incomes pay larger amounts of tax because their taxable income is larger.
When did the federal income tax become progressive? ›
By the 1860s, the progressive tax had become a grudgingly accepted element of the English fiscal system. In the United States, the first progressive income tax was established by the Revenue Act of 1862.
What are the pros and cons of progressive taxes? ›
Advantages and disadvantages of progressive tax
The taxes they pay have a greater impact on their standard of living than they do on high-income taxpayers, most of whom can easily afford to pay for the basics. However, critics of progressive tax systems believe they act as a disincentive to hard work and success.
Progressive taxes help reduce inequality
Progressive taxes, particularly direct income taxes, are a key channel for governments to reduce inequality in the short run.
What are the disadvantages of a progressive tax system? ›
The cons are that a progressive tax discriminates against people making more money, can lead to class warfare, penalizes those that work harder, and can lead to individuals hiding income or assets.
Who pays more taxes, rich or poor? ›
The newly released report covers Tax Year 2021 (for tax forms filed in 2022). The newest data reveals that the top 1 percent of earners, defined as those with incomes over $682,577, paid nearly 46 percent of all income taxes – marking the highest level in the available data.
Why do the rich pay less taxes? ›
Philanthropy pays
Charity is a time-worn way the ultra-rich reduce their taxes — and it has the added bonus of putting a nice luster on their reputation. Many charitable organizations set up by billionaires are tax-exempt, and charitable donations are tax deductible.
Is the federal income tax progressive quizlet? ›
The federal income tax is a progressive tax. -This means that the tax rate a taxpayer is charged depends on how much income she has, with more income resulting in a higher tax rate.
Should tax be progressive? ›
Progressive taxes are designed to reduce income inequality by imposing higher tax rates on those with higher incomes. The additional revenue generated is often used to fund social programs that aim to support lower-income individuals and address economic disparities.
