Progressive Tax

A progressive tax is a tax in which the share of income paid in tax rises as income rises. Someone earning a high income pays not only more money in tax than someone on a low income, but a larger percentage of their income. Most personal income taxes around the world are progressive, usually through a tax-free allowance and a series of brackets with rising rates.

Progressive taxation is one of three broad patterns. A proportional or flat tax takes the same percentage from everyone, and a regressive tax takes a larger percentage from people with lower incomes. The key distinction is between the marginal tax rate on the next unit of income and the average rate on all income: in a progressive system the average rate keeps climbing as income grows. How progressive a country's taxes should be is a central question in debates about economic inequality and the size of government.

Picture a building where rent is charged floor by floor. The ground floor is free, the next few floors cost a little, and the top floors cost more. A tenant who rents only the lower floors pays a small total, while one who rents all the way to the top pays for every floor, including the expensive ones.

Income is treated the same way. Everyone gets the free ground floor, and only the part of income that reaches the higher floors is taxed at the higher rates. Moving up into a higher bracket never makes someone worse off overall, because the higher rate applies only to the extra income above the line.

The average tax rate is total tax divided by total income:

Here $T$ is total tax paid and $Y$ is total income. A tax is progressive when this ratio rises with $Y$.

Take a simple system: the first $10,000 is tax-free, income from $10,000 to $50,000 is taxed at 20%, and income above $50,000 at 40%. Someone earning $30,000 pays $0.2 \times 20{,}000 = 4{,}000$, an average rate of about 13%. Someone earning $100,000 pays $0.2 \times 40{,}000 + 0.4 \times 50{,}000 = 28{,}000$, an average rate of 28%. Both face the same rules, but the higher earner pays a much larger share.

A tax can be progressive even with a single rate if there is a tax-free allowance, because the allowance is worth a larger share of a small income. Progressivity also depends on what is taxed: if investment income or capital gains are taxed lightly, the very top of the distribution can face lower average rates than salaried workers.

Graduated taxes on income and wealth spread in the late 19th and early 20th centuries. Prussia adopted a progressive income tax in 1891, and Britain added a "super-tax" on high incomes in 1909. In 1848 Marx and Engels's Communist Manifesto listed "a heavy progressive or graduated income tax" among its demands, while many liberal and conservative reformers also backed graduated rates as a fair way to fund the state.

The world wars pushed top rates to very high levels. The US top federal rate was above 90% for much of the period from 1944 to 1963, and the UK's top rate on investment income reached 98% in the 1970s. This era overlapped with the Great Compression in income differences. From the 1980s, influenced by supply-side economics, many countries cut top rates and reduced the number of brackets, and several Central and Eastern European countries adopted flat taxes. As of 2026 the US federal top rate is 37% and the UK's is 45%, with additional state, regional and social security charges in many countries.

Economists judge progressivity by the whole tax and benefit system, not one tax. Taxes such as sales tax and payroll contributions are often regressive, while transfer payments and refundable credits are strongly progressive at the bottom. Researchers compare inequality before and after taxes and transfers, often using the Gini coefficient, and the OECD publishes data showing how much each member's tax-benefit system reduces inequality.

Supporters offer several reasons. Ability to pay: an extra dollar matters less to a wealthy person than to a poor one, an argument rooted in diminishing marginal utility. Fairness: those who gain most from markets and public institutions should contribute more. Stability: progressive taxes act as automatic stabilizers, since tax revenue falls faster than income in a downturn, cushioning consumption.

Critics argue that high marginal rates discourage work, saving and enterprise, and that beyond some point higher rates can raise less revenue, the idea behind the Laffer curve. They point out that graduated systems invite complexity and tax avoidance, since high earners can relabel income or move it abroad, and that tax competition limits how far any one country can go. Supporters of flat taxes stress simplicity and equal treatment. Others argue that a progressive outcome can be achieved more efficiently through a flat rate combined with a large allowance or a negative income tax, or through progressive taxes on wealth, such as an inheritance tax.

• OECD: Tax policy