Costs and Benefits of a Progressive Tax System

A progressive tax is a tax where wealthier people pay a greater percentage of their money, be it income or accumulated wealth. Most nations in the world have a progressive income tax system, including the United States. According to, the U.S. federal income tax system has annual income brackets taxed between a minimum of 10 percent ($0 to $8,925.00) and a maximum of 39.6 percent (over $400,000.00) for single individuals. A progressive tax has long been championed as the most fair form of taxation because it places a lower financial burden on the poor.

Progressive taxes have a primary benefit of providing more revenue than other tax systems. This is because the wealthier pay a higher percentage of their wealth or income in taxes. The effect of such a system is believed to generate more tax revenue overall. The higher taxation of the wealthy is also credited with making government revenue more reliable. During good economic conditions, the rich often get richer. This allows government revenue to increase as the wealthy pay a significant portion of their increased income in taxes. During weak economic times, the rich are often comparatively insulated. This allows the government to still collect revenue even though many additional citizens may now be impoverished and unable to pay taxes.

A second benefit of progressive taxes involves continuing an efficient flow of money through the economy. The rich, it is believed, will continue to spend their money in the economy at a steady rate despite having to pay more in taxes. A millionaire facing a 39.6 income tax rate will be a generous stimulator of his or her local economy despite having a high tax burden. A poor person however, may be forced to stop many of his or her consumer purchases due to an even minute increase in taxes.

If a large percentage of a poor person’s non-essential income must be reserved for taxes, then that money cannot stimulate the economy. Simply put, it is better to tax the wealthy more because they can afford to continue stimulating the economy even with a heavy tax burden; this helps the economy function more effectively. Poor people, who cannot handle a heavy tax burden, should be freed up to spend as much of their money in the consumer economy as possible.

A third benefit of progressive taxes is their perceived fairness and reduction of social strife. Simply put, non-progressive taxes are inherently unpopular while progressive taxes are usually popular, at least with the majority of the population.  Since “wealth” in a society is typically subjective, with society stratified according to income and accumulated wealth, only a small segment can be considered “the wealthy.”

In many nations, the population is divided by income or wealth according to quintiles or 20 percent increments. The bottom three quintiles, composed of 60 percent of the population, obviously want more tax burden shifted to the top two quintiles. The bottom four quintiles want more tax burden shifted to the top quintile. Obliging the desires of the masses, and thus keeping the majority of the population happy and heeding the principle of majority rule, necessitates placing more tax burden on the top earners.

Costs however, are also incurred. Progressive taxes, despite helping raise more revenue and keep a larger percentage of the population happy, are far from perfect.

The biggest cost or drawback of progressive taxes is the fact they heavily tax those who have wealth to drive investment and job creation. Many fiscal conservatives claim that taxing the wealthy more prevents them from using their money to create news jobs, invest in new ventures and innovate or perform research. In this line of thinking, the economic power of the wealthy is thought to be sapped by high taxes, so they stop trying to stimulate the economy and thus society; they then give up on investment. Economic productivity slows as a result and a recession occurs. The level of taxation at which this occurs however, is subject to debate.

A second cost or drawback of a progressive tax is the allegation that it decreases the incentive to work harder. The argument is that people will not strive to earn more money if most of that money will be have to be paid in taxes, leaving many people languishing and refusing to exercise their full potential. Essentially, a progressive tax is accused of “punishing” those who are most successful, and eroding the drive to grow and expand one’s business or paycheck. Similarly, a progressive tax, which taxes the poor very little or not at all, is also accused of providing an incentive to remain poor.

Third, a progressive tax may result in, or reinforce, a “tyranny of the majority” scenario. In a society that follows the principle of majority rule, as occurs in most democracies, the legality of a progressive taxation system may encourage citizens to continually argue that tax burdens need to be shifted higher and higher up the income scale. The bottom four quintiles will vote to transfer their entire tax burden onto the top quintile; this unfairly burdens these citizens. By dividing society into strati and creating an “us versus them” situation, a progressive tax may result in political tyranny against the wealthy minority.