The third $10,000 will be taxed at the 25% rate for a tax of $2,500. The second $10,000 will be taxed at the 15% rate for a tax of $1,500. The first $10,000 of taxable income will not be taxed.
The computation of the tax is shown in Table 1. The other portions of their income are taxed at lower tax rates.įor example, if we apply a taxable income of $32,000 to the progressive tax rates in Figure 1, various portions of the taxable income will be taxed at the 0%, 15%, 25%, and 35% tax rates. Rather, it means that only the last portion of their income is taxed at the 35% rate. This does not mean that all of their taxable income is taxed at the 35% rate. For example, you often hear someone state that they are in a certain tax bracket or tax rate (e.g., 35%). Although higher levels of taxable income are taxed at a higher tax rate, it does not mean that all of the income is taxed at the higher tax rate. There is another confusing aspect of progressive tax rates. High income individuals not only pay more tax because their incomes are higher but they also pay a larger portion of their incomes in taxes than low income individuals because their tax rates are higher. Conversely, progressive tax rates mean that high income individuals pay at a higher tax rate than low income individuals. For example, if everyone has the same tax rate (e.g., flat tax), then high income individuals will pay more tax than low income individuals simply because their incomes are higher. This is not to be confused with the simple fact that high income individuals pay more tax because their taxable incomes are higher. It is based on the premise that high income individuals should pay tax on a higher percentage of their incomes than low income individuals. The major progressive tax rate is the individual income tax. Progressive tax rates are common in the United States.
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