Progressive vs Regressive Tax: What It Means for a High-Income Family

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

A progressive tax takes a larger share of income as income rises. A regressive tax takes a larger share from lower incomes, usually because it is a flat amount, a flat rate on spending, or a rate that stops at a cap. A high-earning W-2 family in California pays both kinds at once: steeply progressive federal and state income taxes, and a Social Security tax that becomes regressive above its wage cap.

The labels matter less than what they do to your paycheck. For a two-income household earning $900,000 in California, the next dollar of salary can lose about 51 cents to tax, while the average dollar loses about 41 cents. Most planning mistakes at this income come from confusing those two numbers.

How progressive and regressive taxes differ

A progressive tax applies rising rates to slices of income. For 2026, federal income tax for married couples filing jointly runs from 10% on the first $24,800 of taxable income to 37% on taxable income over $768,700 (IRS Rev. Proc. 2025-32). Only the income inside each bracket is taxed at that bracket’s rate, so moving into a higher bracket does not raise the tax on the income below it.

A regressive tax takes a falling share of income as income rises. Sales and excise taxes are the usual examples: a family earning $90,000 spends a larger share of its income on taxable goods, while a family earning $900,000 saves or invests much of it. A payroll tax with a cap works the same way above the cap.

A proportional (flat) tax takes the same share at every level. California’s State Disability Insurance withholding is now one: 1.3% of all wages for 2026, with no wage cap since 2024 (California EDD).

Which of your taxes fall in each group

Worked example: a $900,000 and a $2 million household

Assumptions, for illustration only: married filing jointly, two W-2 earners, no pre-tax deferrals, standard deduction of $32,200 for 2026. The $900,000 household earns $600,000 and $300,000. The $2 million household earns $1.4 million and $600,000. California taxable income is assumed at $880,000 and $1,980,000, using the 2025 California schedules because the 2026 schedules were not yet published. Credits are ignored.

Read the table by row. Income taxes rise as a share of wages (progressive). Social Security stays at the same dollar amount, so its share falls by more than half (regressive). SDI stays at 1.3% (proportional).

Now the next dollar. An extra $1 of salary to the higher earner in the $900,000 household is past the Social Security cap, so it pays 37% federal, 2.35% Medicare, 10.3% California and 1.3% SDI: about 51 cents. In the $2 million household it pays 37%, 2.35%, 12.3% plus the 1% surtax, and 1.3%: about 54 cents. The California tax gives little federal benefit here, because at these incomes the 2026 SALT deduction cap phases down to its $10,000 floor.

The same family in Washington

Washington has no individual income tax in 2026 (WA Department of Revenue). The $900,000 household above would pay the same federal and payroll taxes plus a WA Cares premium of $5,220 (0.58%), unless a spouse holds an approved exemption. Its total falls to about $290,249, or 32.2% of wages, and the next dollar of salary loses about 40 cents instead of 51.

Washington leans on sales and business taxes instead, which is why its overall system is usually described as regressive. For a family at this income, that mostly works in its favor today. Two changes cut the other way. Washington taxes long-term capital gains at 7% on gains above the annual standard deduction ($278,000 for 2025) and 9.9% on taxable gains over $1,000,000. And the 2026 Legislature passed a 9.9% income tax on individuals and married couples filing jointly with AGI over $1,000,000, effective January 1, 2028, with first returns due in April 2029 (WA DOR FAQ). A $2 million household should not plan a move north around the 2026 numbers alone.

California also does not let go of income earned while you lived there. California taxes nonresidents on compensation for services performed in California, so stock options or RSUs earned for work done there can stay partly taxable by California after you move (FTB Publication 1100).

Advantages and disadvantages of regressive taxes

Supporters point to three advantages. Regressive taxes such as sales taxes are simple to collect. They raise steady revenue because spending moves less than income in a downturn. And nearly everyone pays something. The Social Security cap has its own logic: benefits are also capped, so the tax tracks the benefit you can earn.

The disadvantage is the burden. A lower-income household pays a larger share of what it earns, often on necessities. Progressive taxes reverse that, at the cost of more complexity and a higher marginal rate on each extra dollar for families like the ones in the table.

Three decisions where the marginal rate matters

1. Pre-tax versus Roth 401(k). The 2026 deferral limit is $24,500. At 37% federal plus 10.3% California, a full pre-tax deferral reduces current income tax by about $11,589 in the $900,000 household. Deferrals still pay Social Security, Medicare and SDI. Roth contributions can make more sense in a year when your marginal rate is unusually low, such as a year one parent is home with a new baby.
2. RSU withholding gaps. Employers usually withhold federal tax on vested RSUs at the 22% supplemental rate (37% only on supplemental wages over $1,000,000 in the year). At a 37% bracket, a $200,000 vest can leave about $30,000 of federal tax unpaid until April. Plan estimated payments or extra withholding.
3. Timing income across years. Because the brackets are progressive, the same income costs less when it is spread evenly. A deferred compensation election, or shifting a bonus into a lower-income year, uses that. A year with a sabbatical or a career change is worth flagging early.

For more on lowering the income those brackets apply to, see how to reduce MAGI, and for taxable investment accounts, how brokerage accounts are taxed before you sell.

Why the kiddie tax exists

Progressive brackets create an obvious idea: move investment income to the children, who sit in the lowest brackets. The kiddie tax blocks most of that. For 2026, a child’s first $1,350 of unearned income is tax-free, and unearned income over $2,700 is taxed at the parents’ rate (Form 8615 instructions). For a household at the 37% bracket, a large UTMA account mostly loses its tax advantage. See UTMA withdrawal tax rules before funding one.

What to write down for your kids

Children see the result of tax decisions, not the reasoning. A one-page note each year with your marginal rate, why you chose pre-tax or Roth, and why you did or did not move can teach a teenager more about progressive taxes than a civics class. Conversations fade. Documentation compounds. Age Five Family Office™ builds that record into the FamilyKnowledge® Library through Age Five Wealth Education.

Questions families ask

Is the federal income tax progressive?

Yes. For 2026 it has seven rates from 10% to 37%, applied to slices of taxable income. A married couple pays 37% only on taxable income above $768,700. Long-term capital gains have their own progressive scale of 0%, 15% and 20%, and the 3.8% Net Investment Income Tax adds a layer above $250,000 of joint MAGI.

Is Social Security tax regressive?

Above the cap, yes. For 2026 the 6.2% employee share stops at $184,500 of wages per earner, so it takes 6.2% of a $150,000 salary but about 1.9% of a $600,000 salary. Each spouse has a separate cap. If one person works for two employers and overpays, the excess can be claimed as a credit on the tax return (IRS Topic 608).

Does California tax capital gains at a lower rate?

No. California taxes capital gains as ordinary income, at the same progressive rates as wages (FTB). For a high-income family selling appreciated company stock, the combined federal and state rate on a long-term gain can exceed 37%, which is why the timing and size of sales deserve a plan.

Next step

Find your household’s marginal rate for 2026, federal plus state plus payroll, and use it for every pre-tax, Roth and timing decision this year. If you want help working it out, our tax management and retirement and employee benefits work starts with a Tax & Wealth Assessment.

This is general education, not individual advice. The right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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