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Regressive vs. Proportional vs. Progressive Taxes: An Overview
Tax systems in the U.S. fall into three categories: regressive, proportional, or progressive. Regressive and progressive taxes impact high- and low-income earners differently but proportional taxes don’t. Property taxes are an example of a regressive tax. The U.S. federal income tax is progressive. Occupational taxes are a type of proportional tax.
Taxes can also be classified as indirect or direct taxes. Indirect taxes such as some excise taxes are incurred by a manufacturer or supplier and then passed on to consumers. They’re tacked on to what a consumer pays for a given product. Income taxes are direct taxes. They’re not passed on and the taxpayer is liable for them.
Regressive taxes have a greater impact on lower-income individuals than on the wealthy. A proportional tax is also called a flat tax. It affects low-, middle-, and high-income earners relatively equally. They all pay the same tax rate regardless of income but this places a greater burden on low-income individuals.
A progressive tax has more of a financial impact on high-income individuals than on low-income earners. Tax rates and tax liability increase in line with a taxpayer’s income. Investment income taxes and estate taxes are examples of progressive taxes in the U.S.
Key Takeaways
- Regressive tax systems are thought to be disproportionately burdensome on low-income earners because they levy the same percentage on purchased products or goods regardless of the buyer’s income.
- A proportional tax applies the same tax rate to all individuals regardless of their incomes.
- A progressive tax imposes a greater percentage of taxation on higher income levels on the theory that high-income earners can afford to pay more.
- Indirect taxes include excise taxes that are imposed on manufacturers and suppliers and passed on to consumers.
Regressive Taxes
Low-income individuals take a greater hit compared to high-income earners under a regressive tax system. The government assesses tax as a percentage of the asset’s value that a taxpayer purchases or owns. This type of tax doesn’t correlate with an individual’s earnings or income level.
Excise Taxes
Regressive taxes include property taxes, sales taxes on goods, and excise taxes on consumables such as gasoline, airfare, tobacco products, and alcohol. Excise taxes are often indirect taxes. They’re fixed and included in the price of a product or service.
Taxes on cigarettes, gambling, and alcohol are often referred to as sin taxes. They’re a subset of excise taxes imposed on commodities or activities that are perceived to be unhealthy or that negatively affect society. They’re levied in part to deter individuals from purchasing these products. Sin tax critics argue that they also disproportionately affect those who are less well off.
Payroll Taxes
Payroll taxes include Social Security and Medicare. Many consider Social Security to be a regressive tax. Social Security tax obligations are capped at a certain level of income that’s referred to as a wage base, which is at $168,600 in 2024, increasing to $176,100 in 2025. An individual’s earnings above this base aren’t subject to the 6.2% Social Security tax.
The annual maximum you can pay in Social Security tax is therefore capped at $10,453.20 or 6.2% of $168,600 in 2024 or $10,918.20 in 2025 even if you earn $1 million. Employers pay an additional 6.2% on behalf of their workers. Self-employed individuals must pay both halves.
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. The cap limits how much of their income is taxed regardless of an individual’s income.
Social Security is also considered to be a proportional tax because everyone pays the same rate up to the wage base.
Proportional Taxes
A proportional or flat tax system assesses the same tax rate for everyone regardless of income or wealth. This system is intended to create equality between marginal tax rates and average tax rates paid.
Fourteen states used this income tax system as of 2024: Arizona, Colorado, Georgia, Idaho, Illinois, Indiana, Kentucky, Michigan, Mississippi, New Hampshire, North Carolina, Pennsylvania, Utah, and Washington.
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’s 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 a greater percentage than low-income earners. Tax rates and tax liabilities increase with an individual’s wealth. The goal of a progressive tax is to make higher earners pay a larger percentage of taxes than lower-income earners.
Federal Income Tax
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 those with lower incomes. The percentage rate increases at intervals as taxable income increases. Each dollar the individual earns places them into a bracket or category that results in a higher tax rate when earnings meet the next 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 Criticisms
Progressive tax rates have critics. Some say progressive taxation is a form of inequality with higher earners paying more to support low-income earners. The marginal tax rates for an individual range from 10% to 37% in 2024 and 2025 with the wealthiest Americans subject to the highest rate on their top dollars. Others argue that the tax code benefits wealthy individuals who can avoid income tax through tax breaks.
According to the Tax Policy Center, 40.1% of U.S. citizens didn’t pay income taxes in 2023 because they didn’t earn enough to reach the lowest tax rate. A study by White House economists examining the 400 wealthiest U.S. families from 2010 to 2018 concluded that they paid an average income tax rate of 8.2% despite high marginal tax rates, less than the lowest tax bracket.
Estate taxes are another example of progressive taxes. They predominantly affect high-net-worth individuals (HNWIs) and increase with the size of the estate. Only estates valued at $13.61 million or more are liable for federal estate taxes in 2024. This increases to $13.99 million in 2025 to adjust for inflation.
Examples of Regressive, Proportional, and Progressive Taxes
These examples show regressive, proportional, and progressive taxes in practice.
Regressive Tax Example
Sales taxes are based on the cost of a product rather than the income of the individual who purchases the product. Those with lesser incomes pay a greater portion of their total incomes than those who earn more because all shoppers pay a 6% sales tax on their groceries regardless of whether they earn $30,000 or $130,000 annually.
An individual who earns $20,000 a year and pays $1,000 in sales taxes on consumer goods would pay 5% of their annual income for sales tax. It would represent only 1% of their income if they earn $100,000 a year and pay the same $1,000 in sales taxes.
Proportional Tax Example
Individual taxpayers pay a set percentage of annual income regardless of how much they earn under a proportional income tax system. The fixed rate doesn’t increase or decrease as income rises or falls. An individual who earns $25,000 annually would pay $1,250 in tax at a 5% rate. Someone who earns $250,000 each year would pay $12,500 at that same 5% rate.
Progressive Tax Example
Income taxes operate under a progressive system in the United States. Federal progressive tax rates will range from 10% to 37% in 2025. The marginal rate of taxation for a single taxpayer is:
- 37% on income over $626,350
- 35% on income from $250,525 to $626,350
- 32% on income from $197,300 to $250,525
- 24% on income from $103,350 to $197,300
- 22% on income from $48,475 to $103,350
- 12% on income from $11,925 to $48,475
- 10% on income from $0 to $11,925
The tax rates are applied progressively from 10% to 37%. A single taxpayer with a taxable income of $50,000 in 2025 doesn’t pay the 22% rate on all their income. They pay 10% on the first $11,925 then 12% on income from $11,926 to $48,475. They pay 22% only on the amount over $48,475.
Are Income Taxes Progressive Taxes?
It can vary between the state and federal levels. Federal income taxes are progressive. They impose low tax rates on low-income earners and higher rates on higher incomes. Individuals in 12 states are charged the same proportional tax rate regardless of how much income they earn as of 2024.
Are Regressive Taxes Fair?
Regressive taxes may seem fair because they’re imposed equally on everyone regardless of income but they hurt low-income earners more than others. These earners spend a larger portion of their incomes on regressive taxes than people who earn more.
What Taxes Are Considered Regressive?
Regressive taxes are those that are paid regardless of income. They include sales taxes, sin taxes, and property taxes.
The Bottom Line
Paying taxes is inevitable but how much of an impact they have depends on the tax system that’s used and how much you earn. Regressive sales, property, sin taxes, and proportional taxes have a greater impact on low-income earners because they spend a greater percentage of their incomes on taxation than other taxpayers. The federal tax system used in the United States is progressive. It usually impacts high-income earners more than others.