Progressive Tax Examples

What is Progressive Tax Examples?

The following article provides an outline for Progressive Tax Examples. Progressive taxes increase and decrease according to the increase and decrease in the taxable income of the taxpayer. Therefore, high-income earners will have to pay more taxes in comparison to low earners. This is established by formulating a tax bracket for the income of taxpayers and assigning the tax rates to each bracket.

Explanation

The progressive tax system is based upon the logic that flat or the same tax rate irrespective of the incomes of the taxpayers is not a fair scheme; it would put a disproportionate burden on low-income earners. The U.S. tax system is an example of a progressive taxation system.

The structure of the progressive tax system depends on how much tax burden is to be transferred to high-income people. The progressive tax system reduces the tax burden on the poor people and gives them the freedom to spend their money on essential commodities and contribute to the economy. It also helps in the collection of more taxes in comparison to flat rate or regressive tax system, thus, increasing the total revenue generated from the taxes. But sometimes, this system is criticized on the ground that it is putting unwanted burdens or punishments on rich and even middle-class people.

Examples of Progressive tax

Let us look at the below examples of the progressive taxes with calculations:

Example #1

Let us take an imaginative example wherein the below tax rates table first two columns need to be used to calculate the taxes as per the progressive tax system. Then, the third column provides the calculated tax figure, which is derived by applying the progressive tax rate on income. We can easily notice that as the income is increasing tax rate is also increasing.

So anyone having income up to $10,000 will pay taxes at the rate of 10%, and above that, the combination of rates will be used to calculate the tax liability, which we will see in the next 3 examples.

Example #2

Let us take another example; herein, we have tax brackets and an individual whose taxable income is $100,000 per annum. We will now see how much tax the individual will have to pay per the progressive tax system bracket in which the income would fall.

For ease of calculation purposes, we are not considering any above the line or standard deduction amount. We are assuming that $100,000 is the final adjusted taxable income. The total tax liability for the year is $18,000.

Example #3

Let us take another example; we will use the same tax rate table. This time a taxpayer John who is earning $35,000 per annum as taxable income, wants to know his tax liability for the year.

John will have to pay taxes at the rate of 10% on the first $10,000 of his income and at the rate of 15% at the remaining $25,000. For ease of calculation purposes, we are not considering any above the line or standard deduction amount. We are assuming that $35,000 is the final adjusted taxable income. The final tax liability is $4,750.

Example #4

Now in our final example, using the same tax rate table, we have to calculate the tax liability for Mona, whose taxable income is $250,000 per annum. Again, the calculation would be similar, but a little complex as more tax rates will be used; let us see below the calculation of the tax liability.

Mona’s tax liability would be calculated as follows:

After referring to the above examples, we can understand how the progressive tax system works. We may notice that tax payable is increasing according to the income of the individuals. For example, a person whose taxable income is $35,000 per annum is paying $4,750 as tax in comparison to the person with the taxable income of $250,000 per annum and tax liability of $58,500.

Conclusion

The progressive tax system is designed in such a way that it would not cast an unwanted burden on poor or low earning populations so that they can spend their money on essential commodities to fulfill their needs and contribute to the economy. Nowadays, the income tax system in many countries is according the progressive tax schemes. It is beneficial in that it generates more tax revenue than a flat rate or regressive tax system.

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