Proportional, Progressive, and Regressive taxes
Taxes are distinguished by the effect they have on the distribution of income and wealth. A proportional tax is a kind that applies the same relative liability on each taxpayer—i.e., where tax liability and income increase in the same levels. A progressive tax is recognisable by a larger than proportional growth in the tax burden in relation to the rise in income, and a regressive tax is recognised by a less than proportional increase in the comparable liability. Thus, progressive taxes are viewed as taking away a lack of equality in income distribution, but regressive taxes can have the effect of increasing these inequalities.
The taxes that are often regarded as progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, could become less so in the upper-income demographic—especially if a taxpayer is permitted to lessen his tax base by claiming deductions or by leaving out some income aspects 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 a given period does not absolutely come up with the most appropriate measure of taxpaying requirements. For example, transitory growth in income may be saved, and within temporary declines in income a taxpayer could select to pay for consumption by reducing savings. Ergo, if taxation is regarded with “permanent income,” it should be less regressive (or more progressive) than when held in comparison with annual income.
Sales taxes and excises (except those on luxuries) tend to be regressive, because the dissemination of individual income consumed or spent for specific goods lessens as the level of personal income grows. Poll taxes (aka head taxes), calculated as a standard amount per capita, clearly are regressive.
It is complicated to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of uncertainty about the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of dictating who bears the tax burden lays fundamentally on whether a national or a subnational (that is, provincial or state) tax is being considered.
In analysing the economic effects of taxation, it is relevant to distinguish between differing concepts of tax rates. The statutory rates will include those specified in the law; often these are marginal rates, but occasionally they are average rates. Marginal income tax rates note the fraction of incremental income that is taken by taxation when income is increased by one dollar. Ergo, if tax onus rises by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax statutes usually contain graduated marginal rates—i.e., rates that grow as income rises. Structured analysis of marginal tax rates are required to take into account provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) reduces by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points more 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 important ones for assessing incentive effects of taxation. It is even more complicated to know the marginal effective tax rate to apply to income from business and capital, as it may be dependant on considerations including 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 nothing under a consumption-based tax.
Average income tax rates signify the part of total income that is required 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 rises with income. Average income tax rates usually 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 fundamentally by high-income households may dwarf these effects, producing regressivity, as signified by average tax rates that decrease as income rises.
For MYOB Brisbane expert advice, contact Stone Consulting today. Stone Consulting also runs MYOB training in Brisbane.
Sphere: Related ContentComments
Tell me what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!