Proportional, Progressive, and Regressive taxes
Taxes are categorized by the effect they have on the placement of income and wealth. A proportional tax is a tax that places the same relative requirement on every taxpayer—i.e., when tax liability and income move in equal proportion. A progressive tax is characterizable by a larger than proportional growth in the tax onus in regard to the rise in income, and a regressive tax is characterized by a less than proportional rise in the relative burden. So, progressive taxes are regarded as reducing a lack of equality in income distribution, whereas regressive taxes are found to increase these inequalities.
The taxes that are generally believed to be progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, might become less so within the upper-income demographic—especially if a taxpayer is able to reduce his tax base by declaring deductions or by removing particular income elements from his taxable income. Proportional tax rates which are applied to lower-income groups can also be more progressive if exemptions of a personal nature are made.
Income measured over the period of a given year might not definitely give the most accurate measure of taxpaying requirements. For example, transitory rises in income might be saved, and in temporary declines in income a taxpayer may choose to pay for consumption by decreasing savings. Therefore, if taxation is compared alongside “permanent income,” it should be less regressive (or more progressive) than when it is compared with annual income.
Sales taxes and excises (with the exception of luxuries) are generally regressive, because the portion of one’s income consumed or spent on a specific good lessens as the amount of personal income is raised. Poll taxes (also known as head taxes), nominated as a fixed amount per capita, obviously are regressive.
It is not simple to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to the lack of certainty surrounding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of deciding who bears the tax burden rests fundamentally on whether a national or a subnational (that is, provincial or state) tax is being considered.
In analysing the economic purposes of taxation, it is necessary to distinguish between differing concepts of tax rates. The statutory rates are dictated in legislature; generally these are marginal rates, but occasionally they are mean rates. Marginal income tax rates indicate the fraction of incremental income demanded by taxation when income is increased by one dollar. Therefore, if tax onus increases by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax laws commonly contain graduated marginal rates—i.e., rates that grow as income grows. Careful analysis of marginal tax rates are required to consider 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 increase in income, the marginal rate is 20 percentage points higher than nominated within the statutory rates. Since marginal rates signify how after-tax income moves in response to changes in before-tax income, they are the important ones for assessing incentive effects of taxation. It is even more complicated to know the marginal effective tax rate applied to income from business and capital, as it may be dependant on such factors as the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem determines that the marginal effective tax rate in income from capital is nil under a consumption-based tax.
Average income tax rates show the part of total income that is required in taxation. The pattern of average rates is the one that is in consideration for appraising 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 also because marginal tax rates are graduated; on the flip side, preferential treatment of income received mostly by high-income households may swamp these effects, allowing regressivity, as indicated by average tax rates that decline as income increases.
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