Proportional, Progressive, and Regressive taxes
Taxes are distinguished by the impact they have on the placement of income and wealth. A proportional tax is the kind that impinges the same relative burden on each taxpayer—i.e., where tax liability and income increase in equal proportion. A progressive tax is characterizable by a more than proportional growth in the tax burden in regard to the increase in income, and a regressive tax is characterizable by a less than proportional growth in the comparative onus. Ergo, progressive taxes are regarded as reducing a lack of equality in income distribution, but regressive taxes can cause an increase in these inequalities.
The taxes that are normally thought to be progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, might become less so for the upper-income class—especially if a taxpayer is allowed to lower his tax base by nominating deductions or by removing some particular income aspects from his taxable income. Proportional tax rates if applied to lower-income demographics can also be more progressive if such personal exemptions are claimed.
Income measured over the course of a given period might not definitely give the most accurate measure of taxpaying requirement. For example, transitory rises in income can be saved, and in temporary declines in income a taxpayer might decide to provide for consumption by reducing savings. Ergo, if taxation is held in comparison with “permanent income,” it can be less regressive (or more progressive) than when compared with annual income.
Sales taxes and excises (with the exception of luxuries) are mostly regressive, because the dissemination of personal income consumed or spent for a specific good lowers as the level of personal income increases. Poll taxes (also known as head taxes), calculated as a fixed amount per capita, clearly are regressive.
It is complicated to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of the lack of certainty about the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of determining who bears the tax burden is dependant essentially on whether a national or a subnational (that is, provincial or state) tax is being decided.
In assessing the economic purposes of taxation, it is important to distinguish between several concepts of tax rates. The statutory rates will be dictated in the law; often these are marginal rates, but in some cases they are average rates. Marginal income tax rates denote the fraction of incremental income demanded by taxation when income grows by one dollar. Therefore, if tax onus rises by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax regulations usually contain graduated marginal rates—i.e., rates that increase as income rises. Careful analysis of marginal tax rates need to regard provisions apart from the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lessens by 20 cents for each one-dollar increase in income, the marginal rate is 20 percentage points more than specified within the statutory rates. Since marginal rates specify how after-tax income changes in response to changes in before-tax income, they are the necessary ones for appraising incentive effects of taxation. It is even more difficult to know the marginal effective tax rate applied to income from business and capital, as it may be reliant on considerations including the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem holds that the marginal effective tax rate in income from capital is nil under a consumption-based tax.
Average income tax rates determine the portion of total income that is taken in taxation. The pattern of average rates is the one that is relevant for considering the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates usually grow with income, both because personal allowances are allowed for the taxpayer and dependents and because marginal tax rates are graduated; on the flip side, preferential treatment of income received for the most part by high-income households could swamp these effects, allowing regressivity, as signified by average tax rates that lessen as income increases.
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