The progressive tax rates are a financial scheme in which the tax rate increases as income rises. The system is composed of Multiple levels, or brackets, with higher rates for those with greater incomes. For instance, taxes may Start at 0% for low incomes and increase up to 45% for high incomes. In this case, your last dollar of income will be taxed at a higher rate, called the marginal tax rate, than the average overall tax rate.
Governments use different methods of taxing, such as progressive tax rates, regressive, rambling, and proportional taxes. In progressive systems, people must pay more taxes once they earn more income. At times, there might be a minimum amount, and one is allowed not to pay any taxes if they earn below that particular amount.
Examples of Progressive Tax
Here are some of the examples for progressive tax rates;
Investment Income Taxes
These are taxes on money made from investments. They mostly affect people who have extra money to save and invest.
Taxes on Income Made from Interest Earned
This is the tax that will be applied on interest earned from savings or investments, which, in excessive terms, is considered passive income.
Income from Rentals
Any remaining income after deducting costs incurred when running rentals is taxed. This applies to individuals who have invested in rental properties.
Estate Duties
The tax charged on the assets of a deceased person. It usually applies if the government set a certain amount that has been reached by estate value.
Tax Deductions
These are incentives the government provides that enable low-income earners to save money. Such include earned income credit, elderly and disabled credit, child tax benefit, and saver’s credit for retirement contributions.
Benefits of Progressive Tax
Let’s read about some benefits of progressive tax rates;
- Fair Tax Distribution: People who make more money pay a higher percentage in taxes, so they carry more of the tax burden.
- Less Tax for Low Earners: Lower-income people pay less in taxes, so their tax burden isn’t too heavy.
- More Money for the Government: The government collects more tax revenue than a system where everyone pays the same percentage.
The Economists’ View on Progressive Tax Rates
A country’s economy grows through investments, often made with the money left after people spend. In a well-functioning economy, savings should equal investments. This means that after spending, people should invest their leftover money in ways that make more money.
In a progressive tax rates system, people with higher incomes pay higher taxes. This leaves them with less extra money and may discourage them from working harder or investing more since additional income is taxed at higher rates. This can lead to less investment, hurting the economy over time.
For people who benefit from progressive taxes, their buying power can increase. This can lead to higher demand for essential and subsidized goods, which can help boost growth in areas that might otherwise struggle. There are two main views on how progressive taxes affect economic growth. Classical economists believe the economy should grow naturally without government help.
Impact of Inflation on a Progressive Tax System
Inflation occurs when prices rise without a better standard of living. This reduces the value of money and investments. In a progressive tax system, inflation can make people pay more taxes than they should. Their income may move into higher tax brackets, even if their real income hasn’t increased.
If you want to learn more about accounting, check out Finprov Learning. We offer a range of accounting courses for graduates, including Tally accounting courses, Goods and Service Tax and more. Our best accounting courses online are designed for both graduates and professionals to provide a thorough learning experience.
At Finprov, we focus on practical, hands-on training to help you gain real-world skills, not just theory. We also offer job placement assistance to help you start your career after completing our courses. Contact Finprov today to learn more about accounting opportunities and take your knowledge to the next level for a successful future.
