Definition
The term progressive tax refers to a system that takes an increasingly larger percentage of tax from groups with higher levels of income. Progressive tax systems are based on the "ability to pay" principle, which states that income taxes should be collected in a manner that is consistent with the amount of discretionary income possessed by the taxpayer.
Explanation
A progressive tax approach increases the tax burden as income increases. This applies to individuals, partnerships, as well as corporations. It's based on the "ability to pay" principle, which states that as income increases, the ability to pay income taxes increases.
Federal income tax in the United States is a progressive tax. As income increases, the incremental tax rate applied to a household or individual also increases. For example, the incremental tax rate for low income individuals is 10%, while the top income earners will pay 39.6%.
Proponents of progressive taxation believe it helps to mitigate the social ills associated with income inequity since it allows low income groups to keep a larger share of their earnings. Critics of the approach believe a system based on ability to pay unfairly penalizes those that have worked hard to earn higher levels of income. Critics also believe progressive taxes reduce an individual's incentive to earn more income.
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