The principle of progressivity consists in that those holders of greater economic capacity should be taxed in proportion to their capacity, in comparison with people who have a lower economic capacity.
In other words, according to the principle of progressivity, whoever has the greatest capacity will contribute to a greater extent through taxes to support public expenditures.
This is a principle of tax law, which regulates the taxes imposed on taxpayers.
Progressivity means that the more economic capacity a subject has, the greater the proportion it must contribute to sustaining public expenditures.
Thus, the same economic capacity, the same tax burden, and the greater the economic capacity, the greater the tax burden.
This principle pursues an equitable distribution of tax burdens, it is a manifestation of the principle of equality and the redistribution of wealth.
To understand what the principle of progressivity is, you have to understand what economic capacity is.
The economic capacity refers to the wealth of a subject. This capacity can be obtained from indicators such as the consumption of goods, the ownership of an asset, the obtaining of income or the circulation of wealth. Depending on whether the holder has a greater economic capacity or not, he will face a greater or lesser tax burden.
Functions of the progressivity principle
It is possible to notice three functions of this principle:
- The tributes must fall on the people who have the economic capacity to bear it.
- Not all wealth or economic capacity should be subject to the tax burden, but what is necessary for the vital needs of the holder must be taken into account. And not only will not be subject to tax what is necessary for a vital minimum, but there will be a limit established in the tax law itself. The latter is known as the principle of non-confiscation. For example, it can be established that the tax base cannot exceed $ 30,000.
- It serves to modulate the application of taxes according to both the financial and personal situation.
The essential notes are:
- It is a principle that does not concern the particular circumstances of the person, but is taken into consideration through the tax base. The tax base is the amount that will be used to know the amount of the tax to be paid on. It is there when the economic capacity will be observed.
- Its ultimate purpose is the distribution in the State of the economic resources of the taxpayers.
- This progressivity can be applied in two ways: aliquots by step sections and aliquots by classes or continuous.
Progressive tax classes
In progressive taxes, the percentage to be applied will depend on the amount of the tax base. It can be divided into two classes at the same time:
- Aliquots by sections or by steps: In this case, the tax base will be divided into tranches and each part will be applied its corresponding percentage. Once its percentage has been applied to each tranche, the resulting quotas will be added and the result of that sum will be the tax amount to be collected by the State. An example of this type of tax is income tax or IRPF. Let’s look at a case:
|Payable Base||Tax type|
|0 $ -10,000 $||5%|
|$ 10,001 – $ 25,000||fifteen%|
|$ 25,001 – $ 45,000||twenty%|
- For the first $ 10,000 you pay $ 500, that is, 5% of $ 10,000.
- For the second $ 15,000 he pays $ 2,250. It is the result of 15% of $ 15,000 which corresponds to the second tranche (25,000 – 10,000).
- And for the remaining $ 18,000 he pays $ 3,600. It is the result of 20% of $ 18,000, which is the corresponding to the third tranche (43,000 – 25,000).
- Total: $ 500 + $ 2,250 + $ 3,600 = $ 6,350
The $ 6,350 will be the full fee to be paid to the State.
- Aliquots for classes or continuous: Depending on the amount of the tax base, it will be taxed with a single tax and the result of applying that tax to the tax base will be the tax amount to be collected by the State. Let’s look at a case: If we take the previously shown table as a reference, if the taxable base is $ 43,000, 20% will be applied to all that amount:
20% of $ 43,000 = $ 8,600
Therefore, your full installment to be paid to the State will be $ 8,600.
A clear example of a progressive tax is the Personal Income Tax. If the income obtained by the subject increases, the amount to be paid will increase.