Progressive taxation is a system where the tax rate increases as the taxpayer’s income increases. In other words, those who earn more pay a higher percentage of their income in taxes than those who earn less.
For instance, if ₦1 million is taken from someone who earns ₦2 million a year, that would be 50% of the person’s income which will be a huge burden to the person as compared to the same ₦1 million taken from a person that earns ₦50 million which translates to only 2% for this person.
Progressive taxes are designed to be fair by making richer people pay more, reason being it will be easier on them based on their higher income levels.
Examples of tax types where progressive taxation is applied include personal income tax, estate taxes, and luxury taxes on goods & services.
Some Benefits of a Progressive Tax Structure
Revenue Generation Limitations:
Flat taxes may generate less revenue in total due to high earners contributing less than they could under a progressive structure.
Equity Concerns:
Flat taxes are not always fair. If everyone pays 10% of their earnings for example, it could be somewhat burdensome for the person who earns ₦1 million, as he/she might struggle to afford basic needs. While for the person earning ₦50 million, the weight and effect will not be as much. Flat taxes do not consider how much people can actually afford, so lower earners end up carrying more of the burden.
Weak Redistribution Effects:
One of the core purposes of taxation is to help narrow economic inequality. Regressive systems tend to worsen income inequality, reduce economic mobility, slow economic growth; leaving fewer resources for social facilities like, education, healthcare, roads, etc.
Tax Expenditures
Luxury Import Waivers:
Waivers on luxury goods like private jets, yachts, and luxury cars are often framed as business or tourism incentives. The major beneficiaries of such waivers are high net worth individuals and not the general public. In Nigeria, waivers are applicable on luxury cars intended for diplomats and/or investors.
Real Estate Incentives:
Governments offer incentives like mortgage interest deductions or lower taxes on property investment to encourage homeownership and investment. However, the main beneficiaries of such incentives are not the common man but, wealthy individuals who own expensive or multiple properties. Instead of boosting affordable housing, more funds are often driven into luxury real estate thereby, making housing less accessible to the common man.
Capital Gains Tax:
Profits made from selling assets like stocks or real estate are often taxed at lower rates than ordinary income. Many countries apply lower rates on capital gains than on regular wages thereby, benefitting the few wealthy individuals who earn more from assets as opposed to a majority of the people who rely mainly on salaries.
Investment Incentives:
Tax holidays or investment deductions are often designed to stimulate economic growth, but they are frequently accessed by large corporations or high net worth individuals, rather than small and medium-sized enterprises (SMEs) or young entrepreneurs. Without strict accountability, these incentives become loopholes, militating against development.
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Luxury Tax:
These are special taxes on expensive items like private jets, yachts, and luxury cars. Such items are bought by the wealthy; taxing these items make the rich contribute more, help reduce inequality and also provide funds for public services.
In Nigeria 10%, 39%, and 5% are the tax rates on private jets, yachts, and luxury cars respectively leading to an income generation of ₦160 billion annually.
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Estate/Inheritance Tax
These are special taxes applied on large estates/inheritances above a set threshold.
Reason: Reduces wealth concentration.
Global Benchmark: Can raise Gross Domestic Product (GDP) in high-wealth economies annually, by 0.1–0.3%.
Nigeria: A net wealth tax could generate ₦6 billion or more yearly; enough to double the health budget.