Progressive Taxation: How Most Countries Tax Income

A 19th-Century Invention#

Progressive income tax — where higher earners pay a higher percentage of their income — is a relatively modern idea. Before the late 19th century, most governments funded themselves through tariffs, excise duties, property taxes, and head taxes (a fixed amount per person, regardless of wealth). The first modern progressive income tax was introduced in Prussia in 1891; the United Kingdom adopted progressive income tax rates around the same time. The United States enacted a modest federal income tax in 1913, following the 16th Amendment.

Today, nearly every OECD country uses a progressive income tax for the central government, though rates, brackets, and exemptions vary enormously. The principle is now so entrenched that even countries that have experimented with flat taxes — Estonia, Latvia, Hungary, Russia — have mostly seen those experiments eroded by exemptions, credits, or additional levies that re-introduce progressivity in practice.

The Core Principle#

Progressive taxation rests on two related ideas:

1. Ability to pay. A household with €200,000 of annual income can spare a larger share of that income for taxes than a household with €30,000 — because essentials like food, rent, and transport consume a smaller share of the higher household's budget. Taking 30% from the higher household leaves them comfortable; taking 30% from the lower household may leave them unable to cover rent.

2. Diminishing marginal utility. A dollar (or pound, or euro) matters more to someone who has few of them than to someone with many. The classical argument — traced to thinkers like Jeremy Bentham and John Stuart Mill — is that progressive taxation produces less total "loss of welfare" than flat taxation, because each dollar taken from a high earner represents less sacrificed utility.

These are philosophical claims, not empirical facts, and they remain contested. Critics — including many libertarian economists — argue that comparing utility across people is impossible or meaningless, and that progressive taxation amounts to moral confiscation.

Example: Progressive tax debates are political philosophy as much as economics. The Rawlsian perspective (from John Rawls's A Theory of Justice) argues that a just society would design tax systems behind a "veil of ignorance" — without knowing whether one would be rich or poor — and would therefore favour strong progressivity. The Nozickian perspective (from Robert Nozick's Anarchy, State, and Utopia) argues that taking a larger share from high earners is a form of forced labour and therefore unjust. Both views are coherent; they differ on underlying premises.

Brackets, Bands, and Rates#

Progressive systems divide income into brackets, each taxed at its own rate. A higher bracket applies only to income within that bracket, not to total income.

• UK (2024–25): 0% up to £12,570, 20% to £50,270, 40% to £125,140, 45% above.
• US federal (2024): 10%, 12%, 22%, 24%, 32%, 35%, and 37% — with brackets varying by filing status.
• Sweden (municipal + state): Flat municipal rate of about 32% plus a 20% state tax above roughly SEK 600,000.
• France: 0%, 11%, 30%, 41%, 45% — plus the CSG and CRDS social taxes that effectively function as additional flat-rate levies.
• Germany: A smooth progression function (not discrete brackets) ranging from 0% to 45%, plus a solidarity surcharge on top for high earners.

Marginal vs. Effective Rates#

A persistent source of public confusion is the difference between marginal rate (the rate on the last dollar earned) and effective rate (total tax as a share of total income). A UK worker earning £70,000 has a marginal rate of 40% but an effective rate closer to 25%, because lower brackets are taxed at lower rates. Politicians and journalists routinely conflate the two, often (intentionally or not) producing misleading impressions of the tax burden.