Progressive and Regressive Taxes
08 August 2017 | Pago Pago, American Samoa
There is something of an American consensus that taxes should be progressive. How much so is debated. It is a matter of social policy to be considered in light of growing income inequality.
A tax is progressive if, as a percentage, the amount of the tax increases more than the basis of the tax does. This means for an income tax, the amount of the tax goes up by more than income does as income rises. If the tax goes up by the same percentage as income, it is neutral. If it goes up by a lesser percentage than income it is regressive. Regressive taxes are thought to be unfair to poorer people because rich people pay proportionally less of their income on the tax.
VAT taxes, sales taxes, gas taxes, excise taxes, flat rate taxes and payroll taxes are all regressive. Payroll taxes become increasingly regressive as the income cap is exceeded because those with ever higher incomes pay ever proportionally less tax as a percentage of their income. That is the test. That is why VAT, sales, gas and flat rate taxes, etc., are all regressive. Degree of progressivity can increase or decrease, as can regressivity, depending on the tax rates.
With growing income inequality and the rich getting proportionally richer faster, preferred social policy is to have increasingly progressive taxes on the rich. Inheritance taxes should also be high and progressive to make for more equal opportunity among younger citizens.
Again, the assessment issue is what percentage of income is being taken as taxes from the poor and then from the rich, assuming both are taxed.