What Are Graduated Income Tax Rates?

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Graduated income tax rates require those who make more to be taxed more, and vice versa. These rates are adjusted every year and account for the different Income Tax Brackets that filers may fall into.

What Is a Graduated Income Tax?

A graduated income tax, which is also called a progressive tax, is a tax on personal income with a rate that increases as taxable income amounts increase. Currently, graduated income tax brackets are recognized at the Federal level, but states are also beginning to use the graduated method.

Every year the Income Tax Brackets change, but it is still a good idea to get a general picture of what potential progressive taxes may look like in the following year. It’s also important to understand common misconceptions; for example, some people believe a graduated income tax lumps all personal income into the highest bracket. This is false. Income should be broken into smaller categories and taxed at different rates accordingly.

Examples of progressive taxes:

  • Estate tax;
  • Investment income;
  • Tax credits.

Progressive Tax Pros and Cons

Typically the supporters of progressive taxation are those who are less wealthy, but this is not always the case.

Progressive taxes keep standard of living in mind. A teacher does not make as much money as a doctor. Therefore, it can be assumed that the money remaining after the living wage is taken care of is much higher for the doctor than the teacher. They are both integral to society’s function and they both assumably pay taxes. If they were both taxed in the same manner, the teacher would have less money year-over-year and the doctor would become increasingly wealthy. Progressive taxation gives those in a lower socioeconomic status the potential means toward better financial circumstances.

A common argument against the graduated income tax is that individuals should not be penalized for making more money than others in society. Other rebuttals against progressive taxation claim that it creates inequalities among the classes. Another potential issue is that people on the cusp (according to tax brackets) can be impacted negatively. To elaborate, an individual who is on the cusp of the middle and upper class (but is considered the upper class) will be taxed the same as someone who is making significantly more but is taxed the same.

Of course, anything that deals with the fiscal policy will usually come with nuances. While the fiscal policy is out of one’s direct or personal control, improving personal finance via salary negotiation or by asking for a promotion/raise is not.

Other Types of Tax Systems

Flat Tax

A flat tax, which is also referred to as a proportional tax system, is a system of taxation that applies a constant tax rate on all individuals no matter the amount of income they make. This type of tax is typically applied to individual income or corporate income. While there are many countries that have flat (or proportional) taxes, there are also ten U.S. states that tax income via a flat tax rate. Investment income is exempt under a system of flat taxation, so this type of tax is potentially more beneficial to the wealthy.

Examples of flat taxes:

  • Negative income tax;
  • Capped flat tax.

Regressive Tax

A regressive tax takes the average tax rate and minimizes it as taxable income increases, meaning that regressive taxes and progressive taxes act as polar opposites. When taking individual income into account, regressive taxation affects the wealthy in a positive way, and the poor in a negative way. This is due to those with lower incomes paying respectively more than individuals with higher incomes or wealth. For example, if there is a flat tax of $50, fifty percent of the income of someone who earns $100 is taxed, while someone earning $500 is only taxed ten percent.

Examples of regressive taxes:

  • Lump-sum tax;
  • Poll taxes;
  • Sales taxes;
  • Property taxes.

Sin Tax

A sin tax is a sales tax placed on particular items that are believed to be harmful not only to individuals, but to society as a whole. Sin taxes are used to increase the total cost of the items deemed harmful to hopefully limit or diminish usage. Sin tax affects the user of these goods directly and it is considered a type of regressive tax.

Examples of items affected by sin taxes:

  • Gambling;
  • Alcohol;
  • Tobacco;
  • Pornography;
  • Fast food.

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This post was updated August 22, 2019. It was originally published August 23, 2019.