Progressivity: A Cornerstone of Smart Policy in Taxes


Many people do not understand what the notion of being a progressive is about. It’s the notion that the more wealth, the more power, the larger the insitution, the faster the regulatory and taxation burden should grow. A progressive taxation system would follow a curve like this:

  • $1 Earned, 5% taxation on first dollar
  • $2 Earned, 10% taxation on second dollar
  • $3 Earned, 15% taxation on third dollar
  • $4 Earned, 20% taxation on fourth dollar
  • $5 Earned, 25% taxation on fifth dollar

In other words:

  • You make $1, you pay a total of 5 cents in taxes
  • You make $2, you pay a total of 15 cents in taxes
  • You make $3, you pay a total of 35 cents in taxes
  • You make $4, you pay a total of 80 cents in taxes
  • You make $5, you pay a total of 125 cents in taxes

Alternatively, a progressive scheme can be created/and or enhanced by “flat” tax cuts, such as giving a equal tax credit regardless of wealth. For example, let’s say you cut everybody’s tax bill by $500 per year. The rich person who pays $10,000 in taxes gets them reduced to $9,500, while the poor person who pays $750 in taxes, only pays $250 in taxes. The value to the poor person is far greater then the wealthier person.

There are three reasons why progressive taxation (and regulation) is an important concept for society.

  • We want to encourage growth by making it easier for people to get started in business with a much lower regulatory and taxation burden
  • The Law of Diminishing Marginal Utility states that every additional dollar or additional product that one owns, the value to the owner decreases.
  • We want to discourage businesses from growing too large, dominating the economy, and discouraging innovation.

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Untitled at Allegheny National Forest on November 11, 2010

Society needs taxes to pay for the public services, programs, and infrastructure that are used in common or are neccessary to promote a just and fair society. Yet, when we tax society, we should always be working to create a tax and regulatory structure:

  • That encourages small businesses to grow.
  • That encourages creativity and new approaches to old problems.
  • That allow less affluent people to accumulate money and resources to help them invest in their own future and become more affluent.

Good tax policy encourages innovation and growth. That’s what progressive tax policy does, unlike other more regressive schemes of taxation that over-tax the poor, and discourage them from making the investments needed for growth and personal improvement.

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