Proportional, Progressive, and Regressive taxes
Taxes can be differentiated by the impact they have on the distribution of income and wealth. A proportional tax is a kind that applies the same relative requirement on every taxpayer—i.e., where tax liability and income move in relative scale. A progressive tax is characterized by a greater than proportional growth in the tax onus in regard to the increase in income, and a regressive tax is characterizable by a less than proportional growth in the comparative burden. So, progressive taxes are regarded as removing a lack of equality in income distribution, but regressive taxes are found to have the effect of an increase in these inequalities.
The taxes that are usually considered progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, may become less so for the upper-income categories—in particular if a taxpayer is able to reduce his tax base by nominating deductions or by removing some income components from his taxable income. Proportional tax rates that are applied to lower-income classes would also be more progressive if exemptions of a personal nature are declared.
Income measured over a given year may not necessarily come up with the best measure of taxpaying ability. For example, transitory increases in income could be saved, and during temporary declines in income a taxpayer may elect to pay for consumption by taking from savings. Thus, if taxation is held in comparison alongside “permanent income,” it can be less regressive (or more progressive) than if held in comparison with annual income.
Sales taxes and excises (excepting those on luxuries) are mostly regressive, because the portion of own income consumed or spent on specific goods lessens as the amount of personal income grows. Poll taxes (also termed head taxes), nominated as a fixed amount per capita, clearly are regressive.
It is not easy to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally due to the uncertainty about the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating who bears the tax burden lays crucially on whether a national or a subnational (that is, provincial or state) tax is being determined.
In regarding the economic effect of taxation, it is necessary to distinguish between several ideas of tax rates. The statutory rates are nominated in legislation; usually these are marginal rates, but sometimes they are mean rates. Marginal income tax rates denote the fraction of incremental income taken by taxation when income increases by one dollar. Therefore, if tax burden rises by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax regulations generally contain graduated marginal rates—i.e., rates that rise as income rises. Careful analysis of marginal tax rates need to consider provisions other than the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lowers by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points greater than nominated within the statutory rates. Since marginal rates display how after-tax income moves in response to changes in before-tax income, they are the appropriate ones for assessing incentive effects of taxation. It is even more complicated to understand the marginal effective tax rate applicable to income from business and capital, because it may be reliant on factors 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 nil under a consumption-based tax.
Average income tax rates signify the part of total income that is taken in taxation. The pattern of average rates is the one that is important for judging the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates usually increase with income, both because personal allowances are provided for the taxpayer and dependents and because marginal tax rates are graduated; on the other side of things, preferential treatment of income received predominantly by high-income households may swamp these effects, allowing regressivity, as shown by average tax rates that fall as income increases.
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