Proportional, Progressive, and Regressive taxes
Taxes can be categorized by the effect they have on the distribution of income and wealth. A proportional tax is the kind of tax that imposes the same relative requirement on each taxpayer—i.e., in the case where tax liability and income increase in relative proportion. A progressive tax is characterized by a higher than proportional growth in the tax burden in regard to the increase in income, and a regressive tax is recognisable by a less than proportional growth in the comparable liability. So, progressive taxes are viewed as taking away the lack of equality in income distribution, whereas regressive taxes might increase these inequalities.
The taxes that are often thought to be progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, could become less so within the upper-income demographic—in particular if a taxpayer is allowed to lower his tax base by nominating deductions or by taking certain income elements from his taxable income. Proportional tax rates that are applied to lower-income demographics would also be more progressive if exemptions of a personal nature are made.
Income measured over the course of a given period may not absolutely come up with the most appropriate measure of taxpaying ability. For example, transitory growth in income could be saved, and within temporary declines in income a taxpayer may choose to provide for consumption by decreasing savings. Thus, if taxation is compared along with “permanent income,” it should be less regressive (or more progressive) than if compared with annual income.
Sales taxes and excises (save luxuries) are generally regressive, because the portion of one’s income consumed or spent for specific goods decreases as the rate of personal income rises. Poll taxes (also known as head taxes), calculated as a flat amount per capita, obviously are regressive.
It is not simple to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of the uncertainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of dictating who bears the tax burden is dependant crucially on whether a national or a subnational (that is, provincial or state) tax is being debated.
In regarding the economic effects of taxation, it is relevant to distinguish between differing points of tax rates. The statutory rates will be nominated in legislature; generally these are marginal rates, but sometimes they are average rates. Marginal income tax rates note the fraction of incremental income that is demanded by taxation when income is increased by one dollar. Ergo, if tax onus increases by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax legislation commonly contain graduated marginal rates—i.e., rates that increase as income rises. Structured analysis of marginal tax rates need to consider provisions as well as the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lessens 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 display how after-tax income is changed 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 know the marginal effective tax rate applicable to income from business and capital, as it may be dependant on such considerations as 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 nil under a consumption-based tax.
Average income tax rates display the portion of total income that is paid in taxation. The pattern of average rates is the one that is important for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates generally rise with income, both because personal allowances are provided for the taxpayer and dependents and also because marginal tax rates are graduated; on the other hand, preferential treatment of income received for the most part by high-income households can dampen these effects, allowing regressivity, as shown by average tax rates that lessen as income increases.
For MYOB Brisbane expert advice, contact Stone Consulting today. Stone Consulting also runs MYOB training in Brisbane.
Sphere: Related Content