Proportional, Progressive, and Regressive taxes
Taxes can be distinguished by the impact they have on the distribution of income and wealth. A proportional tax is a tax that puts the same relative burden on all the taxpayers—i.e., where tax liability and income increase in relative levels. A progressive tax is characterizable by a more than proportional increase in the tax burden in regard to the growth in income, and a regressive tax is characterizable by a less than proportional increase in the related burden. Ergo, progressive taxes are viewed as removing inequity in income distribution, while regressive taxes are seen to have the effect of an increase in these inequalities.
The taxes that are normally believed to be progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, might become less so for the upper-income demographic—especially if a taxpayer is allowed to lower his tax base by declaring deductions or by taking particular income parts from his taxable income. Proportional tax rates that are applied to lower-income categories will also be more progressive if such personal exemptions are made.
Income measured over the course of a given period does not definitely give the most suitable measure of taxpaying requirements. For example, transitory increases in income may be saved, and within temporary declines in income a taxpayer could elect to pay for consumption by reducing savings. Ergo, if taxation is regarded alongside “permanent income,” it would be less regressive (or more progressive) than if made comparable with annual income.
Sales taxes and excises (except those on luxuries) tend to be regressive, because the dissemination of individual income consumed or spent on specific goods declines as the level of personal income grows. Poll taxes (also termed head taxes), nominated as a fixed amount per capita, patently are regressive.
It is difficult to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally due to a lack of certainty regarding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating who bears the tax burden rests crucially on whether a national or a subnational (that is, provincial or state) tax is being considered.
In regarding the economic effect of taxation, it is important to distinguish between differing ideas of tax rates. The statutory rates are those nominated in legislature; generally these are marginal rates, but for some cases they are median rates. Marginal income tax rates denote the fraction of incremental income that is taken by taxation when income rises by one dollar. So, if tax onus increases by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax legislature usually contain graduated marginal rates—i.e., rates that rise as income rises. Structured analysis of marginal tax rates need to review provisions apart from the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) falls by 20 cents for each one-dollar increase in income, the marginal rate is 20 percentage points higher than specified in the statutory rates. Since marginal rates signify how after-tax income moves in response to changes in before-tax income, they are the appropriate ones for considering incentive effects of taxation. It is even more difficult to understand the marginal effective tax rate applied to income from business and capital, because it may depend 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 portion 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 provided 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 can dampen these effects, allowing regressivity, as indicated by average tax rates that lessen as income grows.
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