Proportional, Progressive, and Regressive taxes
Taxes are categorized by the effect they have on the allocation of income and wealth. A proportional tax is one that places the same relative onus on every taxpayer—i.e., where tax liability and income move in the same levels. A progressive tax is characterized by a greater than proportional rise in the tax liability in relation to the increase in income, and a regressive tax is characterized by a less than proportional growth in the relative burden. Hence, progressive taxes are seen as taking away inequalities in income distribution, whereas regressive taxes might result in an increase these inequalities.
The taxes that are usually thought 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 categories—particularly if a taxpayer is able to lower his tax base by claiming deductions or by leaving out some income aspects from his taxable income. Proportional tax rates when applied to lower-income classes can also be more progressive if personal exemptions are declared.
Income measured over the period of a year may not necessarily give the best measure of taxpaying requirements. For example, transitory growth in income might be saved, and within temporary declines in income a taxpayer may decide to provide for consumption by decreasing savings. Ergo, if taxation is made comparable along with “permanent income,” it would be less regressive (or more progressive) than if it is made comparable with annual income.
Sales taxes and excises (save those on luxuries) are generally regressive, because the spread of own income consumed or spent on specific goods lessens as the level of personal income grows. Poll taxes (aka head taxes), nominated as a set amount per capita, patently are regressive.
It is not simple to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of the lack of certainty surrounding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of determining who bears the tax burden rests fundamentally on whether a national or a subnational (that is, provincial or state) tax is being debated.
In analysing the economic effect of taxation, it is important to differentiate between varied concepts of tax rates. The statutory rates will be specified in legislature; commonly these are marginal rates, but for some cases they are mean rates. Marginal income tax rates note the fraction of incremental income taken by taxation when income increases by one dollar. So, if tax onus grows by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax legislation generally contain graduated marginal rates—i.e., rates that increase as income grows. Heavy analysis of marginal tax rates need to review provisions other than 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 nominated in the statutory rates. Since marginal rates specify how after-tax income changes in response to changes in before-tax income, they are the appropriate ones for considering incentive effects of taxation. It is even more complicated to realise the marginal effective tax rate applicable to income from business and capital, as it may rely 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 nil under a consumption-based tax.
Average income tax rates indicate the percentage of total income that is taken in taxation. The pattern of average rates is the one that is relevant for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates generally grow with income, both because personal allowances are granted for the taxpayer and dependents and due to that marginal tax rates are graduated; on the other hand, preferential treatment of income received mostly by high-income households might dwarf these effects, allowing regressivity, as displayed by average tax rates that decrease as income increases.
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