Types of Progressive Tax
A progressive tax rate correlates with the object of the tax. As incomes and prices rise, so do their respective rates. Another way to look at progressive tax is as a method to assign higher rates to those more able to pay. The two definitions are not equivalent, since income is not necessarily a measure of ability to pay.
Examples can be found in the income tax structures of numerous countries.
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Tax Brackets
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Tax rates that jump precipitously between tax brackets encourage under-reporting of income, to avoid a higher tax rate. For example, if the progressive tax brackets were set at 15 percent for incomes below $25,000 and 25 percent for larger incomes, the tax burden just under $25,000 would be $3,750, whereas the tax burden for the making just above it would be $6,250.
This discontinuity is an extreme case of a high marginal tax increase. Such disincentives in the implementation of a progressive tax system can be eliminated by taxing only the income dollars within a bracket at that bracket's rate.
Sales Tax
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Outside of income, sales taxes can effectively be made into progressive taxes. Luxury taxes place extra tax on goods normally purchased only by those with the greatest disposable wealth. Sales tax exemptions for basic necessities, such as children's clothes or food, may benefit all, but they most benefit those for whom these necessities take up the largest proportion of household income.
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Negative Income Tax
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A negative income tax system would pay those making less than a certain amount to make sure everyone made a minimum amount. In other words, their tax burden would be negative. This system has never been fully implemented, though a mild form exists in the tax credit system. The leading criticism is the high risk of fraud. Another common critique is a possible decrease in incentive to work.
Tax Credits
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Tax credits, in the sense of a state benefit, can be refundable or non-refundable. The latter cannot reduce the worker's tax burden below zero; the former can. The former is therefore a mild sort of negative income tax. Examples include the earned income tax credit and the additional child tax credit. Both give credit based on child count. "Additional" refers to the portion of a child tax credit greater than a household's original tax burden, not additional children.
Exemptions
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Another approach to progressivity is by exemptions. Britain has historically had a flat tax for most of the population, which was made effectively progressive by the use of exemptions.
Graphs
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Graphically, progressive taxes have two types of curves.
A flat tax applied above a certain threshold qualifies as a progressive tax if income dollars below the threshold are not taxed, because higher earners have a higher proportion of their income subject to the tax. The marginal tax rate does not change above the threshold. Tax burden therefore graphs against income as a straight line of positive slope, intercepting income at some non-zero value.
Another progressive curve is a concave-up curve, starting at the origin. Being concave, it has an increasing marginal tax rate everywhere. Starting at the origin, it taxes everyone with a non-zero income.
In practice, tax systems are a combination of these two, starting above some non-zero threshold with an increasing marginal tax rate. (A standard way to implement the non-zero threshold is to not require a tax filing if income is below some threshold.)
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