Regressive vs. Proportional vs. Progressive Taxes: What's the Difference?

Regressive vs. Proportional vs. Progressive Taxes: What's the Difference?

Tax systems in the U.S. fall into three main categories: Regressive, proportional, and progressive. Regressive and progressive taxes impact high- and low-income earners differently, whereas proportional taxes do not. Property taxes are an example of a regressive tax; the U.S. federal income tax is a progressive tax example; and occupational taxes are a type of proportional tax.

Regressive taxes have a greater impact on lower-income individuals than on the wealthy. Proportional tax, also referred to as a flat tax, affects low-, middle-, and high-income earners relatively equally. They all pay the same tax rate, regardless of income.

A progressive tax has more of a financial impact on higher-income individuals than on low-income earners, with tax rate, and tax liability, increasing, in line with a taxpayer's income. Investment income and estate taxes are examples of progressive taxes in the U.S.

Regressive Taxes

Low-income individuals pay a higher amount of taxes compared to high-income earners under a regressive tax system. That's because the government assesses tax as a percentage of the value of the asset that a taxpayer purchases or owns. This type of tax has no correlation with an individual's earnings or income level.

Regressive taxes include property taxes, sales taxes on goods, and excise taxes on consumables, such as gasoline or airfare. Excise taxes are fixed and they're included in the price of the product or service.

Sin taxes, a subset of excise taxes, are imposed on commodities or activities that are perceived to be unhealthy or have a negative effect on society, such as cigarettes, gambling, and alcohol. They're levied in an effort to deter individuals from purchasing these products. Sin tax critics argue that these disproportionately affect those who are less well off.

Many also consider Social Security to be a regressive tax. Social Security tax obligations are capped at a certain level of income called a wage base—$147,000 for the 2022 tax year, rising to $160,200 in 2023. An individual's earnings above this base are not subject to the 6.2% Social Security tax.

The annual maximum that you can pay in Social Security tax is capped at $9,932.00 in 2023, whether you earn $160,200 or $1 million. Employers pay an additional 6.2% on behalf of their workers, and self-employed individuals must pay both halves on earnings up to the wage base.

Higher-income employees effectively pay a lower proportion of their overall pay into the Social Security system than lower-income employees because it's a flat rate for everyone and because of this cap.

Proportional Taxes

A proportional or flat tax system assesses the same tax rate on everyone regardless of income or wealth. This system is meant to create equality between marginal tax rates and average tax rates paid. Nine states use this income tax system as of 2022: Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah.

Other examples of proportional taxes include per capita taxes, gross receipts taxes, and occupational taxes.

Proponents of proportional taxes believe they stimulate the economy by encouraging people to work more because there is no tax penalty for earning more. They also believe that businesses are likely to spend and invest more under a flat tax system, putting more dollars into the economy.

Progressive Taxes

Taxes assessed under a progressive system follow an accelerating schedule, so high-income earners pay more than low-income earners. Tax rate, along with tax liability, increases as an individual's wealth increases. The goal of a progressive tax is that higher earners pay a higher percentage of taxes and more money in taxes than lower-income earners.

The U.S. federal income tax is a progressive tax system. Its schedule of marginal tax rates imposes a higher income tax rate on people with higher incomes, and a lower income tax rate on people with lower incomes. The percentage rate increases at intervals as taxable income increases. Each dollar the individual earns places him into a bracket or category, resulting in a higher tax rate once the dollar amount hits a new threshold.

The standard deduction and itemized deductions allow individuals to avoid paying taxes on a portion of the income they earn each year. The amount of the standard deduction changes from year to year to keep pace with inflation.

Progressive tax rates have critics. Some say a progressive taxation is a form of inequality with higher earners paying more to a nation that supports lower-income earners. The marginal tax rates for an individual range from 10% to 37% in 2023, with the wealthiest Americans subject to the highest rate. Others argue that the tax code benefits wealthy individuals who can avoid income tax through tax breaks.

In 2022, 40.1% of U.S. citizens did not pay income taxes because their earnings were insufficient to reach the lowest tax rate, according to the Tax Policy Center.Conversely, a study by White House economists concluded that the 400 wealthiest U.S. families paid an average income tax rate of just 8.2 percent from 2010 to 2018, despite high marginal tax rates. Income in the form of unrealized capital gains benefited from a tax code known as "step up in basis," where the unrealized gain on an asset is never subject to income tax if the asset is not sold during the owner’s lifetime.

Examples of Regressive, Proportional, and Progressive Taxes

The following examples of regressive, proportional, and progressive taxes show how they work in practice:

Regressive Tax Example

If shoppers pay a 6% sales tax on their groceries whether they earn $30,000 or $130,000 annually, those with lesser incomes end up paying a greater portion of total income than those who earn more. If someone makes $20,000 a year and pays $1,000 in sales taxes on consumer goods, 5% of their annual income goes to sales tax. But if they earn $100,000 a year and pay the same $1,000 in sales taxes, this represents only 1% of their income.

Proportional Tax Example

Under a proportional income-tax system, individual taxpayers pay a set percentage of annual income regardless of how much they earn. The fixed rate doesn't increase or decrease as income rises or falls. An individual who earns $25,000 annually would pay $1,250 at a 5% rate, whereas someone who earns $250,000 each year would pay pays $12,500 at that same rate.

Progressive Tax Example

In the U.S., income taxes operate under a progressive system. In 2023, federal progressive tax rates range from 10% to 37%. For a single taxpayer, the marginal rate of taxation is:

• 37% for incomes over $578,125
• 35% for incomes over $231,250
• 32% for incomes over $182,100
• 24% for incomes over $95,375
• 22% for incomes over $44,725
• 12% for incomes over $11,000

The tax rates are applied progressively from 10% to 37%. A single taxpayer with a taxable income of $50,000 in 2023 does not pay the full 22% rate for their income. Instead, they pay 10% on the first $11,000 of income, 12% on income from $11,001 to $44,724, and 22% for the amount over $44,725. This earner's effective tax rate is 12%.

The Bottom Line

Paying taxes is inevitable. But how much of an impact they have depends on the tax system used and how much you make. Regressive taxes—sales taxes, property taxes, and sin taxes—and proportional taxes have a greater impact on low earners because they spend more of their income on taxation than other taxpayers. But progressive taxes—the federal tax system used in the United States—usually impact high-income earners more than anyone else.

Correction—Apr. 14, 2023: A previous version of this article failed to include the benefits of preferential tax rates on capital gains that affect the effective tax rates in the United States progressive tax system.