Graduated tax

A graduated tax is an income tax that adjusts in relation to the amount subject to taxation. This usually means that those earning the largest amount of income pay the largest tax percentage. When the maximum tax rate is quite high, this represents a strong incentive for high earners to shift their income into tax shelters or move to a different location that charges lower tax rates.

An argument in favor of graduated taxes is that the heaviest tax burden falls on those most able to pay it. An argument against graduated taxes is that those with the greatest entrepreneurial vigor, who support the economy by creating jobs, are penalized for doing so.

For example, a graduated tax might impose a 15% tax rate on the first $30,000 of taxable income, 20% on the next $20,000 of taxable income, and 25% for all additional taxable income.

Related Courses

Accounting for Income Taxes