Net income provides a more accurate account of the financial status. Here’s why.
What is progressive tax?
Progressive tax is the concept that a taxpayer should pay higher taxes if he earns more income and lower taxes if he earns less. In the U.S., people are taxed based on what tax brackets they fall into, with higher income ranges correlating to a higher percentage. Progressive taxes are the main tool used by governments to reduce income inequality.
As a function of overall tax revenue, progressive tax usually refers only to income tax and associated deductions and tax credits. In such a system, taxes levied against an individual become progressively higher or lower depending on the taxpayer’s income, with credits and deductions helping offset the tax ever further.
Progressive taxes take the burden off lower-income people to pay for the things a society needs to function, like roads, schools, or other government services. This helps reduce the effects of income inequality by ensuring that people who earn more put more back in, while those who earn less keep a larger percentage of their income while still consuming the same services.
For taxpayers in the U.S., progressive taxation is accomplished by taxing each dollar of income that falls into a certain range, called a marginal tax bracket, with every dollar beyond that range falling into the next highest tax bracket. As of 2017, the highest individual income tax bracket rate is 39.6%, and the lowest is 10%; for married taxpayers filing jointly, the rates remain the same but the income thresholds are higher, promising a potentially lower tax obligation. Each tax bracket’s income range is adjusted annually for inflation.
Progressive tax example
Green Hill Zone is a newly established country in the middle of the Pacific Ocean. None of its citizens currently pay any income tax, but the government wants to build a hospital and needs the funds to do it. The legislative body of Green Hill Zone passes a progressive income tax that establishes three tax brackets:
$0 – $10,000 = 10% tax.
$10,001 – $1,000,000 = 20% tax.
$1,000,001 and up = 30% tax.
Miles, a citizen of Green Hill Zone, makes $50,000 a year fixing helicopters. Under the new tax scheme, Miles pays 10% in taxes on the first $10,000 he earns, and 20% in taxes on the remaining $40,000. His total tax burden is $9,000, or just 18% of his income on average.