Example: Progressive Tax

• Income tax is a progressive tax.tax forms image by Chad McDermott from Fotolia.com
  
  The Internal Revenue Service classifies the current income tax structure in the United States as a progressive tax. The tax code is characterized by distinct income brackets with a higher tax rate being applied to higher income levels. For instance, Mo Messenger has a taxable income of $5,000 per year and is taxed at a 10 percent rate, yielding a tax payment of $500. Manny Mogul's taxable income is $25,000 and he pays 10 percent on the first $8,375 and 15 percent of the balance of $16,975, yielding a total tax payment of $3,331.25. Manny Mogul's tax rate is 13.33 percent as opposed to Mo Messenger's rate of 10 percent, shifting more of the tax burden to Manny Mogul because he has the higher ability to pay based on income.
  
  

Progressive Tax Explanation

• A graduated income tax with higher marginal tax rates increasing with income level, as in the United States, is a classic example of a progressive tax.
  
  

Example: Regressive Tax

• Mo Messenger and Manny Mogul each purchase a brand new HDTV for $2,000. The state that they both live in has a flat sales tax of 5 percent. Both gentlemen, therefore, pay a tax of $100.
  
  

Regressive Tax Explanation

• This tax is a significantly higher percentage of income for Mo Messenger (2 percent) than for Manny Mogul (0.4 percent). No compensation is made for the fact that Mo Messenger earns less than Manny Mogul. This is a classic example of a regressive tax. The nature of the tax places a higher burden on those with less of an ability to pay based on income.
  
  

Conclusion

• A flat sales tax is not a progressive tax, but rather, a regressive tax.