How Tax Systems Work: Progressive, Regressive, and Flat Taxes Explained

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Orlando Amaya has been shaking cocktails full time at Havana Central in Midtown Manhattan for three years, and his favorite to make is the coconut mojito. He earns the New York City tipped minimum wage, $11 an hour, and his income usually comes close to $70,000, of which nearly $50,000 is tips. His take-home is about $40,000. When Congress passed a deduction for tip income in 2025, he told Marketplace he expected that to rise to $60,000.

Marketplace reported that his expectations “do not line up with the reality of this law.” The gap is the whole story.

Here is the short answer to the question most people arrive with. A raise never leaves you with less money, because a bracket prices only the dollars above its line. Whether you pay a bigger share of your income than someone richer than you depends almost entirely on which taxes you count.

Federal income tax does take a rising share as income rises. Most of the other taxes you pay do not.

A bracket is the price of your next dollar

In section 1 of the tax code the tax is written as a dollar amount plus a percentage: “Over $77,400 but not over $165,000 $8,907, plus 22% of the excess over $77,400.” Those last four words carry the whole design.

Only the excess moves. Crossing into a higher bracket raises the rate on the amount above the line, and every dollar below it keeps the rate it always had.

For a joint return in 2026 the table starts at 10 percent on the first $24,800 of taxable income and ends at $206,583.50 plus 37 percent of anything over $768,700. Before any of it applies, a standard deduction of $32,200 on a joint return, or $16,100 for a single filer, comes off the top.

The number you quote at dinner is not the number you pay. The Congressional Research Service (CRS) puts it flatly: for most taxpayers the average rate, income taxes paid divided by income, is less than their statutory tax rate, and refundable credits can push it below zero.

One thing does bite an extra dollar, at the bottom of the scale. As the earned income tax credit phases out, a single filer with one child in 2023 lost 15.98 cents of credit for every additional dollar over $21,560.

The tax that stops at $184,500

The payroll line is really two taxes. Section 3101 imposes 6.2 percent of the wages you receive for old-age, survivors and disability insurance, plus a separate 1.45 percent for hospital insurance, which is Medicare.

Half of it stops. Congress capped the Social Security half not by lowering a rate but by changing a definition: past the contribution and benefit base, what your employer pays you stops counting as wages for that tax. For 2026 the Internal Revenue Service (IRS) puts this base limit at $184,500, while Medicare has no wage base limit at all and an extra 0.9 percent starts once wages pass $200,000.

That shape has a name. The Tax Foundation, which argues for flatter and simpler taxes, calls the Social Security tax regressive for exactly this reason: it is levied as a flat rate on earnings up to a certain threshold. Higher earners pay a smaller fraction of their income.

It also explains why that line often dwarfs the income tax line. Payroll taxes raised $1.3 trillion in fiscal 2021, 32.5 percent of federal revenue, against 50.5 percent from the individual income tax.

The taxes with no return to file

Sales tax is where one rate produces two burdens. The Tax Foundation’s own illustration: two people each spend $10,000 on goods carrying a 5 percent sales tax and both pay $500. That is a larger percentage burden on the lower-income taxpayer, 1.7 percent of a $30,000 income against 1.0 percent of a $50,000 one.

The rates are not small: the population-weighted average combined sales tax rate is 7.53 percent.

Then there is the house. Property taxes were 70.0 percent of local tax collections in fiscal 2023. A property tax is charged on what a thing is worth, not on what you earned this year. That is why the bill can climb in a year your paycheck does not.

Eight states levy no individual income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Wyoming. The money still comes from somewhere. Individual income taxes are 33 percent of state tax collections nationally. The Tax Foundation notes that New Hampshire and Texas rely heavily on property taxes in lieu of other major tax categories.

Wyoming is on that list. In the small town of Lander, Anita Marple directs the public library, and lately she has spent much of her time going over a difficult budget. The doors are locked and the lights are out more often. “You’re here on a Monday morning and we’re closed until 1 p.m.,” she said.

Property tax is the money that keeps a building like hers open.

Two true sentences about who pays

You have probably heard both of these in the same week. Both are accurate.

In 2023 the top 1 percent of taxpayers earned 20.6 percent of adjusted gross income and paid 38.4 percent of all federal income taxes. Their average rate was 23.6 percent, more than six times the rate paid by the bottom half.

Now change which taxes you count. The Institute on Taxation and Economic Policy (ITEP), which argues for graduated rates, measures every state and local tax against a broad income measure including income that is exempt from tax. It finds the average state levies 11.4 percent for its lowest-income 20 percent of residents, 10.5 percent for the middle 20 percent, and 7.2 percent for the top 1 percent.

ITEP ranks Florida the most regressive state tax code in the country, followed by Washington, Tennessee, Pennsylvania and Nevada. Florida, Washington, Tennessee and Nevada also appear on the no-income-tax list.

The first two rows describe one federal tax. The last two describe everything a state and its towns charge. Neither side is cooking the books; they answer different questions, and yours was about all of it.

Every distribution chart hides a guess

Before any chart can say what a household pays, someone must decide who really bears the corporate income tax. The Tax Foundation separates legal incidence, who hands over the money, from economic incidence, the burden of the tax felt by consumers, by workers through wages, or by shareholders through returns.

The size of that guess is startling. CRS reports that if capital is perfectly mobile, incidence studies put about 73 percent of the burden of the corporate tax on labor. CRS then calls that estimate “too large,” and says smaller elasticities drop labor’s share to roughly 21 percent.

That is not a rounding difference. Whether workers or shareholders carry that tax decides whether a distribution table slopes up at the top or flattens, and the analyst picks.

How a fortune stops being income

Section 61 defines gross income as all income from whatever source derived, then lists fourteen examples: compensation for services, business income, interest, rents and royalties. A share price that went up is not among them.

Section 1001 explains why. Gain is computed on the sale or other disposition of property. Nothing sold, nothing counted.

ProPublica built its 2021 investigation on that gap. It compared what the 25 richest Americans paid in federal income tax with Forbes’s estimate of how much their wealth grew, and called that ratio a “true tax rate.” Those 25 saw their worth rise a collective $401 billion from 2014 to 2018 and paid $13.6 billion, a rate of 3.4 percent.

Jeff Bezos’s wealth rose $127 billion from 2006 to 2018 while he reported $6.5 billion of income and paid $1.4 billion, a 1.1 percent true tax rate. In 2011, his fortune roughly steady at $18 billion, he filed a return reporting a loss and claimed and received a $4,000 tax credit for his children.

The objection to that number, in its own words

Here is where the real disagreement starts, and it is not about arithmetic. Dividing tax paid by growth in wealth measures it against something neither the tax code nor any conventional definition calls income. Emmanuel Saez and Gabriel Zucman built the chart showing the top 400 richest people paying a lower average tax rate than the middle class. They also count refundable credits as government spending rather than negative taxes; count them the other way, Vox noted, and the bottom of the chart moves.

That objection has a century of law behind it. Myrtle Macomber received a stock dividend from Standard Oil of California, paid tax on a supposed income of $19,877 under protest, and sued the Collector to recover it. The Supreme Court held that company profits, and certificates issued to represent them, may not be so taxed until the gain be realized in some form by sale. She had received paper, not money.

The modern version arrived in 2024. Charles and Kathleen Moore put $40,000 in an American-controlled foreign corporation a friend had started in India, took a 13-percent share that distributed nothing to them, and got a $14,729 tax bill anyway. Dan Greenberg, general counsel at the Competitive Enterprise Institute, which represented them, said the ruling lets the government levy income taxes on foreign shareholders who have never received income.

The Supreme Court upheld that tax, called its holding narrow and limited to entities treated as pass-throughs, and declined to decide whether realization is constitutionally required. The Tax Foundation reads its footnote as leaving open taxes on holdings, wealth, or net worth, and taxes on appreciation.

The practical objection is separate. A tax on wealth needs a market value for every asset every year, and the Tax Foundation argues that privately held business assets and farm assets would create significant valuation challenges. Private business assets alone are more than half of what the top 1 percent hold.

The audit lands where the credit is

Humphreys County, Mississippi is a rural Delta county known for its catfish farms, where more than a third of the mostly African American residents are below the poverty line and the median household income is $26,000. On the study ProPublica reported, it is the most heavily audited county in America, examined at a rate 51 percent higher than Loudoun County, Virginia, whose $130,000 median is the highest in the country. More than half of its taxpayers claim the earned income tax credit.

The IRS explained the arithmetic itself, in a report to Senator Ron Wyden. Auditing poor taxpayers is easier: relatively low-level employees, done by mail, about 380,000 of them in a year, 39 percent of every audit the agency conducted, and “the most efficient use of available IRS examination resources.” Auditing wealthy taxpayers takes senior examiners hours upon hours, and the agency said attrition among those examiners is significantly higher.

That is a budget argument, not a moral one.

The Advocate’s own files show what that looks like from the other side. A woman filed three years as head of household and claimed the Earned Income Tax Credit and the Child Tax Credit for two dependents. The IRS audited her and denied both. Her case advocate found she had asked for a reconsideration and never heard back, and that the credit was denied because she did not provide typical records the agency usually accepts as proof.

The rule was never her problem. The paperwork was.

The Government Accountability Office (GAO) found audit rates fell at every income level from tax years 2010 to 2019, from 0.9 percent to 0.25 percent on average, and fell most for taxpayers with incomes of $200,000 and above. Reading the same agency’s data, ProPublica found the top 1 percent audited at a rate of 1.56 percent and earned income credit recipients, who typically earn under $20,000 a year, audited at 1.41 percent.

Those two rates nearly match.

The case for one rate, in its designers’ terms

The Hoover Institution’s flat tax book opens on paperwork, not fairness. The IRS has about 480 tax forms in service, and mails eight billion pages a year to more than one hundred million taxpayers. The authors put compliance costs on individuals and businesses at a minimum of $100 billion.

Their target is the base. Fifteen states already run a single rate on income. The case is that one rate levied once, with a large personal allowance doing the work brackets do now, ends the penalty on saving and the industry built to navigate the schedule.

ITEP’s answer is empirical. Middle-income families in flat-rate states pay on average 2.9 percent of what they earn in state income taxes, against 2.3 percent in graduated-rate states, and a flat rate produces less revenue when top incomes are growing fastest.

Both findings can hold at once. A single rate is simpler, and it moves who pays.

Six words Congress deleted

The 2017 law wrote in its own expiry. Its new section 1(j) applied only to a taxable year beginning after December 31, 2017, and before January 1, 2026, so the rates most people think of as normal were built to lapse.

In 2025 Congress made them permanent by deletion. Section 70101 amends section 1(j) by striking the words “, and before January 1, 2026” and rewriting the heading to read “BEGINNING AFTER 2017.” The identical edit hit the enlarged standard deduction and the cap on deducting state and local taxes.

Not everything was made permanent. The new deduction for overtime is capped at $12,500, or $25,000 on a joint return. It also ends: no deduction shall be allowed under this section for any taxable year beginning after December 31, 2028. The tip deduction is built on the same frame.

Back to the bar in Midtown. Amaya expects $40,000 to become $60,000. The statute caps the deduction, sunsets it, and leaves the details to Treasury regulations, which was Andrew Lautz’s point when Marketplace reported that the expectation and the law do not line up.

The bracket you are about to move into is not the thing to watch.