A regressive tax can be defined as a type of tax that increases in terms of percentage of income as the amount of income gradually declines. The concept of regressive tax is implemented all over Europe however USA has a concept opposite to that of regressive tax system that is called as progressive tax system. The concept of progressive tax defines that different portions of the income of an individual or of a company are taxed at an increasing rates.
For example, under a regressive tax system, the IRS might tax a single filer’s $100,000 income as follows:
The first $8,025 is taxed at 28% = $2,247
The next $24,525 is taxed at 25% = $6,131.25
The next $49,100 is taxed at 15% = $7,365
The final $18,350 is taxed at 10% = $1,835
Total tax owed: $17,578.25
But under a progressive tax system, the IRS might tax a single filer’s $100,000 income as follows:
The first $8,025 is taxed at 10% = $802.50
The next $24,525 is taxed at 15% = $3,678.75
The next $49,100 is taxed at 25% = $12,275.00
The final $18,350 is taxed at 28% = $5,138
Total tax owed: $21,894.25
As the example above shows that a regressive tax system applies a larger burden of tax over the low income earners. On the other hand a progressive tax system burdens the individuals having a high income by taxing only the higher portions of the income. The concept of progressive and regressive tax is important to understand the concepts of tax rates and tax brackets.
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