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When it comes to tax policy, political passions can make all the math, jargon, and technicalities of economics even harder to follow than usual, as terms like “progressive” and “regressive” are hurled back and forth.
But what do these terms mean, and why do they come up so often in tax discussions?
For those pursuing a career in taxation, Northeastern University’s Online Master of Science in Taxation provides a robust context for understanding tax policy.
A progressive tax is simply one approach to determining who pays what amount in their taxes. It isn’t about initiating reform, but rather an attempt to ensure taxation is “fair” to all payers.
A progressive tax system takes into account ability to pay, setting rates based on income. That is, as income (or general wealth) goes up, so does the tax rate; as a percentage of income, poorer individuals tend to pay less, and wealthier or higher-earning individuals pay more.
In theory, this kind of system can apply to individual incomes as well as transactions, but it tends to show up more in the form of income taxes—hence, talk about the different income brackets in America.
Not many business owners raise and lower their prices according to the wealth of each customer. It is much simpler for prices to be set across the board for goods and services, regardless of who is shopping for them.
That is essentially the basis for regressive taxes. A regressive tax does not take into account an individual’s income level or ability to pay, but it is not exactly the opposite of a progressive tax. Frequently, this is seen when the tax is applied to transactions—like a sales tax—and increases the total cost of something. Because that same uniform fee represents a larger proportion of net wealth for the poor, and a smaller share of the total wealth for richer individuals, the impact is felt differently.
A flat, across-the-board amount charged to everyone can make for easy accounting, but it also leads to people paying a different rate of their total wealth in taxes. Again, fairness is relative and depends on where policymakers—and the tax professionals advising them—are putting their focus: the tax rate, or total taxes paid.
Finally, there is proportional taxation. Although this looks similar in some ways to both progressive and regressive taxes, it is still not quite a middle road between the two. On one hand, if everyone paid a set proportion of their income in taxes, the wealthier payers would end up paying more in total than poorer individuals—after all, they would be paying from a larger pool. However, people earning less money tend to spend proportionally more of their income on basics—food and shelter—than those earning more. The tax itself may not be technically regressive, but the net impact on total personal wealth can be.
Ultimately, different interest groups may try to use progressive or regressive as a criticism of tax policy, but their use (or misuse) of the terms boils down to conflicting definitions of “fairness” in taxation.
Political ideology can certainly inform perceptions of what is fair or unfair in tax policy, but it is not a precondition for preferring one system over another.
Research conducted by Northeastern University professor Timothy Rupert found that perceptions of tax policy split along generational lines, with millennials tending to be less likely to recommend a progressive structure than baby boomers or members of Generation X.
Terms like progressive and regressive describe systems—neither is inherently pejorative. Measuring how fair these systems are in practice is a whole different argument, perpetually unfolding in legislatures and households around the world.
Images Courtesy: IRS.gov “Worksheet Solutions”