What’s the Difference Between Progressive Tax and Regressive Tax?

Tax structures can be divided into three categories: progressive, regressive, and proportional. To determine which tax system a country uses, you should evaluate the ratio of tax to income that individuals pay. 

The United States is considered to have a progressive tax system. In this blog post, we will focus on progressive and regressive taxes. Understanding the differences between progressive and regressive tax systems can help small business owners understand the logic behind certain taxes and how they are calculated.

REGRESSIVE TAX

Under a regressive tax system, lower-income individuals end up paying more in taxes than their higher-income counterparts. 

A government using a regressive tax system will determine the tax rate based on a percentage of the value of the asset that is purchased. There is no correlation between the individual’s income and what they are taxed on. 

While the US's income tax is not regressive, there are certain taxes within our system that are regressive. These include property taxes, sales taxes, excise taxes, and taxes on things like gas or airfare.

Regressive tax systems are considered disproportionately unfair to lower-income earners.

PROGRESSIVE TAX

Under a progressive tax system, individuals pay more in income taxes as their income increases. 

The United States’s income tax system is considered to be progressive. Our tax brackets are based on income, and when your income increases, you move into the next marginal tax bracket, increasing the percentage of taxes you pay.

WHAT ARE THE EFFECTS OF REGRESSIVE VS. PROGRESSIVE TAX SYSTEMS?

A regressive tax system is more likely to negatively impact low-income earners. They end up paying a larger percentage of their income on essentials like food, shelter, and transportation. 

Progressive tax rates are more equitable in nature. Additionally, progressive taxes are based on the principle of “ability to pay.” This should contribute to the reduction in income disparity. 

Progressive taxes also yield more revenue for the government, and the collection costs are lower.

THE IMPORTANCE OF GETTING EXPERT TAX GUIDANCE

The US tax system is certainly complicated. While understanding progressive tax vs. regressive tax is a start, small business owners need to have significantly more knowledge to effectively meet their tax obligations. 

One of the best ways for MidSouth small business owners to navigate the American tax system without making expensive or time-consuming mistakes is to work with a certified public tax accountant in Memphis. 

The tax code changes all the time, and your business is required to adapt and comply with every IRS code. That’s why hiring a tax planning advisor is the best decision you can make for your small business. More than 300 businesses trust Chaliff + Associates to handle their bookkeeping, accounting, and tax needs. 

To help your small business stay on top of complex corporate tax codes, request a free consultation with Chaliff + Associates today.