In a progressive system of taxation, there is a greater portion of personal income that gets taxed at certain income levels. Someone making $25k per year, for example, may have a 10% tax rate on this income. Someone earning $50k per year would pay 10% taxes on the first $25k they earned, but then 15% on the remainder of the amount. In the United States, the top tax rate typically hovers around 35%. Is a progressive tax system the best form of fair taxation to bring in the most revenues possible without limiting household income? Here are the key pros and cons to consider.
The Pros of a Progressive Tax System
1. It helps to provide a buffer against income inequality.
It may be important for everyone to have some contribution to the funding of their government, but how much is a fair amount? In a progressive system of taxation, those who earn the least amount are required to contribute the least amount for services to be rendered, keeping the income gap closer than it would be otherwise.
2. It encourages a system of social justice that allows everyone to have a chance at success.
Money may not buy happiness, but it does buy food, clothing, and shelter. Not everyone can afford these basic essentials of life. A progressive tax system helps to create a government that provides assistance to those who need it so that everyone has a chance to pursue their dreams to the best of their abilities.
3. It provides higher overall levels of revenue.
If everyone paid the same percentage rate on their income, a reverse system of taxation would occur. The poor would wind up paying a greater total amount of their income than the rich, creating a system where less money would be collected instead of more money. The progressive system of taxation takes more when people make more so that the entire nation benefits instead of just a select few.
4. It gives people a safety net in which they can operate.
When a person’s income falls, so does their taxation responsibilities. This provides a certain level of protection to those households who have experienced unexpected losses without the need to provide social services and programs because a flat or “fair” tax environment requires certain payments at certain times.
The Cons of a Progressive Tax System
1. It may be interpreted as discriminatory.
There is no getting around the fact that the wealthier a person happens to be, then the greater percentage of taxes they’ll pay in a progressive taxation system. This essentially imposes a discriminatory penalty on those who are able to make more from their creativity, skills, and talent. In some ways, a progressive system only allows a bar to be set to a certain height because there is no encouragement to go any higher.
2. Those who barely break into a new tax bracket may lose their additional earnings.
If 15% of income is taxed at the $25k-$49k level, those who just barely break into a new taxation bracket may find themselves with less overall cash than if they’d stayed below the taxation bracket.
3. It encourages the wealthy to not be transparent about their income.
In 2012, billionaire investor Warren Buffet reported paying just over 17% of his total income in taxes. In comparison that same year, the progressive tax system in the US required households which made above $35k, but below $86k, to pay 25% of their salaries in taxes. In theory, the progressive tax system may work, but the reality is that the wealthy are able to take alternative income methods that the working public cannot take to limit their taxation responsibilities.
4. It creates a complicated system of bureaucracy.
It can take several hours to calculate income levels and file a tax return that is accurate. It can also take several hours to double-check that information to determine if it is accurate. There are other systems of taxation that require fewer hours to complete because there is less complexity involved, which can help people to become more productive in a number of different ways.
The progressive tax system pros and cons show that it may not always be the best system of taxation. Many of the benefits can only be achieved with proper management of the system, which may not always happen. Do the potential benefits outweigh the likely risks of this system? That is a question which should be debated on a consistent basis.
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