Progressive Tax
IntermediateA progressive tax is a tax system in which the tax rate increases as income or the amount being taxed increases, so higher earners pay a larger share of their income in tax.
Most income tax systems are progressive. They divide income into bands, each taxed at a different rate. Importantly, a higher rate applies only to the income within that band, not to the person's entire income.
For example, suppose income up to 20,000 is taxed at 10% and income above that is taxed at 30%. Someone earning 50,000 pays 2,000 on the first 20,000 and 9,000 on the remaining 30,000, a total of 11,000. Their average tax rate is 22%, even though their top rate is 30%.
A common misunderstanding is that moving into a higher tax band reduces take-home pay. Because only the extra income is taxed at the higher rate, earning more always leaves you with more after tax under a standard progressive income tax.
Progressive taxes are based on the idea that people with higher incomes can afford to contribute a larger share. Critics argue that very high top rates may discourage work, investment or entrepreneurship. The degree of progressivity varies widely between countries.
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