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What is a Graduated Tax?

Felicia Dye
Felicia Dye

Graduated tax, also referred to as progressive tax, refers to a system where individuals who earn more money are required to spend more to support their governments. Although this type of system is popular in developed countries, the practice is subject to debate. Supporters argue that it is just because individuals with lower incomes have little or no ability to pay higher rates of tax. Critics argue that progressive tax serves as a penalty on success.

In most successful nations, income tax is an important source of revenue at the federal and lower levels of government. Income tax is usually charged as a percentage of the amount that each taxpayer earns. In some places, everyone may be subject to pay the same percentage regardless of how much money they make. In jurisdictions where there is graduated tax, higher earners are required to remit a higher percentage of their income.

Man climbing a rope
Man climbing a rope

For example, a person who makes $15,000 US Dollars (USD) may be required to remit 10 percent in federal income taxes, while a person earning $35,000 USD may be required to pay 15 percent. If the state tax system mirrors the federal system, the richer individual would be required to pay more in state income taxes too, resulting in a substantially higher portion of a person's overall income devoted to taxation.

When there is graduated tax, the liability does not normally increase for small amounts. The tax burden tends to elevate when income increases from one tax bracket to another. A tax bracket often consists of tens of thousands of US dollars, for example. The basis of a graduated tax system is that individuals with more money have a greater ability to pay more taxes. This practice commonly raises debates about the fairness of such a system.

Supporters believe that a graduated tax is just because those who make less have less ability to bear the burden of supporting the government. Low-income earners spend larger portions of their wages on basic necessities, such as food and fuel. As a result, they often have small amounts of disposable income remaining if they have any at all.

Critics argue that such a system acts as a penalty on those who are most successful. These individuals tend to believe that wealthier people are not responsible for the shortcomings of poorer individuals. It is also argued that this type of system has the potential to smother growth because at some point paying higher rates becomes unsustainable. It is believed that this encourages those who will face the highest tax burdens to take measures to avoid paying, such as heavily relying upon tax shelters.

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