A progressive tax is that tax by which the tax rate increases as the tax base increases, pursuing a re-distributive effect of income or expenses.
Objective of the progressive tax
The progressive tax tries to reduce the incidence of taxes that people with lower purchasing power must pay.
Progressive tax is often applied to personal income taxes, where people with higher incomes pay a higher percentage of those income in taxes than people who enjoy count less income.
It can also be applied to adjust the tax base through tax exemptions, tax credits or selective taxes, which create progressive distribution effects.
Progressive tax vs. Proportional tax
A proportional tax is the type of tax that is contrary to the progressive tax. The tax rate in a proportional tax is always the same, it does not vary depending on whether the tax base that must be taxed increases or decreases. Therefore it does not distinguish between people with greater or lesser benefits.
Types of Progressive Taxes
In general, a progressive tax increases by increasing the tax base, but within it we can distinguish different cases:
Limited or digressive progression : the tax rate grows when the tax base increases, but its growth is decreasing.
Unlimited or absolute progression : the growth of the tax rate is not subject to any maximum limitation.
Continuous progression : each fraction of income is settled at a different tax rate, no matter how small the difference between rents.
Progressivity by steps : the set of values that the tax base can take is divided into a series of intervals each of which corresponds to a different tax rate. This progressivity is proportional within the values of each interval.
Criticisms of the Progressive Tax
On the progressivity of taxes there are different criticisms:
It can involve discrimination depending on the unit-taxpayer on which the tax is applied, usually it charges more to the family unit than to an individual unit.
Progressivity implies a degree of arbitrariness in its fixation and modification.
It can produce demotivating effects on the incentives to work, since it can lead to the payment of a higher tax.
Example of a Progressive Tax - The case of the IRPF
The clearest example of progressive tax in Spain is the Personal Income Tax (IRPF), where each individual must pay a higher percentage rate the higher their income. In the IRPF, a scale of tranches is available for which different increasing rates are applied to the amount of the tax base.
For example, a citizen with a tax base of 20,000 euros will pay a 20% tax on the first 12,450 euros and 25% on the remaining 7,550 euros.