Proportional, Progressive, and Regressive taxes
Taxes can be categorized by the impact they have on the placement of income and wealth. A proportional tax is the kind of tax that applies the same relative requirement on all the taxpayers—i.e., where tax liability and income move in the same proportion. A progressive tax is characterizable by a greater than proportional rise in the tax burden relative to the rise in income, and a regressive tax is recognisable by a less than proportional growth in the comparable liability. Ergo, progressive taxes are seen as taking away inequalities in income distribution, whereas regressive taxes are believed to cause an increase in these inequalities.
The taxes that are often considered progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, could become less so in the upper-income demographic—especially if a taxpayer is permitted to lessen his tax base by claiming deductions or by leaving out certain income elements from his taxable income. Proportional tax rates if applied to lower-income demographics could also be more progressive if such exemptions of a personal nature are claimed.
Income measured over a given year may not absolutely offer the best measure of taxpaying ability. For example, transitory growth in income may be saved, and within temporary declines in income a taxpayer could choose to pay for consumption by reducing savings. Therefore, if taxation is made comparable alongside “permanent income,” it can be less regressive (or more progressive) than if it is made comparable with annual income.
Sales taxes and excises (save luxuries) tend to be regressive, because the share of personal income consumed or spent for specific goods declines as the amount of personal income is raised. Poll taxes (also known as head taxes), calculated as a standard amount per capita, clearly are regressive.
It is hard to classify corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to a 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 depends for the most part on whether a national or a subnational (that is, provincial or state) tax is being debated.
In assessing the economic purpose of taxation, it is necessary to differentiate between varied points of tax rates. The statutory rates include those nominated in legislation; generally these are marginal rates, but occasionally they are mean rates. Marginal income tax rates denote the fraction of incremental income that is demanded by taxation when income increases by one dollar. So, if tax liability rises by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax statutes commonly contain graduated marginal rates—i.e., rates that increase as income rises. Careful analysis of marginal tax rates should regard provisions apart from the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) decreases by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points greater than specified within the statutory rates. Since marginal rates indicate how after-tax income increases or decreases in response to changes in before-tax income, they are the appropriate ones for assessing incentive effects of taxation. It is even more difficult to nominate the marginal effective tax rate applicable to income from business and capital, as it may be reliant on factors including the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem grants that the marginal effective tax rate in income from capital is zero under a consumption-based tax.
Average income tax rates indicate the fraction of total income that is paid in taxation. The pattern of average rates is the one that is in consideration for considering the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates usually grow with income, both because personal allowances are granted for the taxpayer and dependents and also due to that marginal tax rates are graduated; conversely, preferential treatment of income received predominantly by high-income households might dwarf these effects, producing regressivity, as indicated by average tax rates that fall as income increases.
For MYOB Brisbane expert advice, contact Stone Consulting today. Stone Consulting also runs MYOB training in Brisbane.
Translator
