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 liability on all taxpayers—i.e., when tax liability and income move in the same scale. A progressive tax is characterizable by a more than proportional increase in the tax onus relative to the rise in income, and a regressive tax is characterized by a less than proportional increase in the relative liability. Therefore, progressive taxes are regarded as fighting inequity in income distribution, whereas regressive taxes may result in increasing these inequalities.
The taxes that are generally believed to be progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, may become less so within the upper-income class—in particular if a taxpayer is permitted to lessen his tax base by claiming deductions or by leaving out particular income parts from his taxable income. Proportional tax rates if applied to lower-income demographics could also be more progressive if personal exemptions are made.
Income measured over the course of a given year might not definitely provide the most accurate measure of taxpaying ability. For example, transitory growth in income might be saved, and during temporary declines in income a taxpayer might decide to provide for consumption by taking from savings. Thus, if taxation is compared along with “permanent income,” it should be less regressive (or more progressive) than when made comparable with annual income.
Sales taxes and excises (with the exception of luxuries) are usually regressive, because the share of one’s income consumed or spent for specific goods decreases as the level of personal income grows. Poll taxes (also known as head taxes), nominated as a standard amount per capita, clearly are regressive.
It is complicated to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally due to uncertainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of deciding who bears the tax burden lays for the most part on whether a national or a subnational (that is, provincial or state) tax is being decided.
In assessing the economic purpose of taxation, it is important to differentiate between varied points of tax rates. The statutory rates are specified in the legislation; generally these are marginal rates, but occasionally they are mean rates. Marginal income tax rates note the fraction of incremental income that is taken by taxation when income is increased by one dollar. Therefore, if tax liability rises by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax legislature generally contain graduated marginal rates—i.e., rates that rise as income rises. Structured analysis of marginal tax rates should take into account provisions other than the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) declines by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points more than indicated 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 important ones for assessing incentive effects of taxation. It is even more complicated to know the marginal effective tax rate applicable to income from business and capital, as it may rely 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 display the fraction of total income that is demanded in taxation. The pattern of average rates is the one that is necessary for appraising the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates usually rise with income, both because personal allowances are granted for the taxpayer and dependents and due to that marginal tax rates are graduated; conversely, preferential treatment of income received predominantly by high-income households may swamp these effects, allowing regressivity, as signified by average tax rates that lessen as income grows.
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