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What Is a Graduated Income Tax?

A taxpayer reviewing the federal income tax brackets to calculate how much he owes in the graduated income tax system.

A graduated income tax is the same thing as a progressive income tax system, where you pay a larger percentage of tax on your income as you earn more money. This system works differently from the flat tax system, in which everyone gets taxed at the same percentage of their income. Here’s a breakdown of how the graduated income tax works. If you need help with your own tax planning, consider working with a financial advisor.

Understanding the Graduated or Progressive Income Tax

The graduated or progressive income tax system is a structure where the tax rate increases as the taxable amount increases. So, taxpayers who earn more will pay more taxes.

The goal of this system is to distribute the tax burden more equitably among taxpayers of varying income levels. It is guided by a social equity principal: Taxpayers with a higher ability to pay should contribute more towards the public treasury.

Pros and Cons of a Graduated Tax

Advocates of the graduated or progressive income tax system argue that it can promote social justice and support targeted wealth redistribution. While critics push back, saying that it is less economically efficient than a flat tax system, does not incentive productivity and can create the potential for greater tax avoidance or tax evasion. Here’s a roundup of the most common reasons in favor and against.

Advantages of a Graduated Income Tax

Advocates of a graduated income tax system highlight several potential benefits. First, supporters argue that it plays an important role in addressing income inequality.

By imposing a higher tax burden on individuals with higher incomes, the system aims to redistribute wealth and foster a more equitable distribution of resources within society. This approach aligns with the “ability to pay” principle, which asserts that those with greater financial means should contribute a larger percentage of their earnings to support essential government services. These typically include education, healthcare and social welfare programs.

Advocates argue that the graduated income tax system not only serves as a fair means to finance public goods, but also contributes to a more just and inclusive society. Additionally, proponents contend that this type of taxation could enhance economic stability by closing the gap on income inequality, and ultimately fostering a more balanced and sustainable economy.

When it comes to revenue generation, the graduated income tax has proven to be a robust tool. According to the U.S. Department of Treasury, the graduated income tax in the U.S. has generated 51% of total federal revenue as of February in fiscal year 2024. For a comparison, Social Security and Medicare taxes made up another 34% in the same period.

Advocates argue that this revenue is significantly more than what a flat tax system could raise. But this is primarily due to the higher tax rates applied to higher income brackets.

Disadvantages of a Graduated Income Tax

Critics of the graduated income tax system argue several drawbacks with this approach. One of the most significant is its complexity. The U.S. tax code, which spans over 2,600 pages, can make it difficult for taxpayers to understand their obligations and could potentially lead to errors in tax calculation or filing.

Opponents also argue that higher tax rates on higher incomes could drive high-earning taxpayers to look for ways to avoid taxes or evade them altogether. According to the IRS, tax evasion costs the U.S. government an estimated $458 billion annually.

Furthermore, economists like Thomas Sowell argue that progressive taxation can discourage investment and economic growth. The argument is that by imposing a higher tax burden on the wealthy, the system can reduce the incentive for entrepreneurship and risk-taking, which are key drivers of economic growth.

Graduated Tax vs. Flat Tax

An individual taxpayer estimating his taxes on the graduated income tax system.

The debate between a graduated tax system and a flat tax system focuses on how you tax income. In a graduated tax system, individuals are taxed at different rates based on their income levels. Advocates argue that this approach promotes income equality by placing a higher tax burden on higher earners, redistributing wealth and addressing social and economic disparities. Critics, however, believe that higher tax rates on the wealthy can stifle economic incentives and hinder job creation, which could potentially reduce economic growth.

Supporters of the flat tax system, on the other hand, argue that it imposes a uniform tax rate on all income levels, which treats everyone equally regardless of their earnings. They also point out that the flat tax focuses on simplicity, as it involves a single tax rate for all income brackets, and therfore makes it easier to understand and administer.

Additionally, they argue that a flat tax reduces compliance costs for both individuals and government agencies, which eliminates the need for complex tax planning and reduces administrative burdens.

Critics, however, argue that a flat tax disproportionately impacts lower-income individuals, as a single rate can be regressive, meaning that it takes a larger percentage of income from those with lower earnings.

One key distinction between both systems lies in their philosophical underpinnings. Graduated tax proponents often argue for the principle of ability to pay, asserting that individuals with higher incomes should contribute a larger share of their earnings to support government services. Flat tax advocates, conversely, highlight the idea of fairness through equality and assert that a uniform tax rate treats everyone impartially.

Tips for Graduated Income Tax Planning

When planning for taxes under a graduated income tax system, you need to consider your income level, potential deductions and credits, among other factors.

An individual taxpayer earning $75,000, for example, would fall into the 22% federal tax bracket for tax year 2024.

But, with strategic tax planning that takes advantage of deductions and credits, you could lower you taxable income and potentially fall into a lower bracket.

Bottom Line

A financial advisor speaking with a client about her tax brackets on the graduated income tax system.

Graduated income tax is a system where the tax rate increases as the taxable income rises. It is designed to grow economic revenue and distribute the tax obligation to those who can afford it. But while advocates argue that the graduated income tax distributes the tax burden more evenly among taxpayers, critics say that it can potentially disincentive taxpayers and undercut economic growth.

Tips for Tax Planning

  • A financial advisor who specializes in taxes can help optimize your portfolio to lower your tax liability. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • As you estimate your taxes each year then you may want to use a free income tax calculator to help make it easier.

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