progressive taxation

Progressive taxation

Characterizes a convex tax schedule that results in a higher effective tax rate on higher income levels. Increases for some increases in income, but never decreases with an increase in income.

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Progressive Tax System

A system of taxation in which persons or corporations are assessed at a greater percentage of their income according to the theoretical ability to pay. That is, taxpayers pay more in taxes if they earn more in income. For example, taxpayers may pay 25% of their income in taxes up to a certain amount, and 35% of everything earned over that amount.

A theory behind progressive taxation states that persons or corporations who earn the same or a similar amount of money should be taxed in the same or a similar way. For example, the theory states that two individuals making $50,000 per year should be taxed the same amount, regardless of how they earned their income. This is known as horizontal equity. While most countries have some form of progressive taxation, it is usually coupled with other taxes, such as a sales tax, and few countries treat all income as exactly the same. See also: Regressive tax system.

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progressive taxation

a structure of TAXATION in which tax is levied at an increasing rate as TAXATION rises. This form of taxation takes a greater proportion of tax from the high-income taxpayer than from the low-income taxpayer. The marginal incidence of taxation rises to some predetermined upper limit, currently 40% in the UK on earned income. For example, a man earning £20,000 with current tax bands as shown in column 1 and the rate of taxation in column 2 would have the tax payable shown in column 3:

column 1	column 2	column 3
tax	tax	tax
bands	rates	payable
(£)	(%)	(£)
0- 5,000	exempt	nil
5,001–10,000	20	1,000
10,001–15,000	30	1,500
15,001–20,000	40	2,000
		-----
		total
		4,500
		-----

The increasing rate of taxation is shown in column 2. The greater the individual's earnings, the greater the rate of tax that is levied.

Virtually all western economies exhibit some form of progressive taxation structure as a means of redistributing income from the more affluent members of society to the poorer (see POVERTY). This type of ABILITY-TO-PAY PRINCIPLE is regarded, as far as earned personal incomes are concerned, as the most equitable form of taxation. Ideally, however, a progressive income tax structure should not only promote social equity by redistributing income, but should also encourage enterprise by avoiding penal rates of taxation at the upper end of the income scale and, together with SOCIAL SECURITY BENEFITS, provide suitable incentives to work at the lower end of the income scale. Compare REGRESSIVE TAXATION, PROPORTIONAL TAXATION. See also INCIDENCE OF TAXATION, REDISTRIBUTION-OF-INCOME PRINCIPLE OF TAXATION, SUPPLY-SIDE ECONOMICS, LAFFER CURVE, MARGINAL RATE OF TAXATION.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005