Proportional, Progressive, and Regressive taxes
Taxes can be categorized by the effect they have on the allocation of income and wealth. A proportional tax is the kind that places the same relative liability on all the taxpayers—i.e., in the case where tax liability and income move in equal proportion. A progressive tax is characterizable by a higher than proportional growth in the tax liability in relation to the growth in income, and a regressive tax is recognised by a less than proportional growth in the relative burden. Thus, progressive taxes are regarded as removing inequalities in income distribution, whereas regressive taxes are believed to result in an increase these inequalities.
The taxes that are often thought to be progressive include individual income taxes and estate taxes. Income taxes that are declarably progressive, however, can become less so for the upper-income categories—especially if a taxpayer is allowed to reduce his tax base by declaring deductions or by taking some income elements from his taxable income. Proportional tax rates if applied to lower-income classes can also be more progressive if such exemptions of a personal nature are claimed.
Income measured over the course of a given year does not absolutely come up with the most suitable measure of taxpaying ability. For example, transitory growth in income might be saved, and during temporary declines in income a taxpayer may choose to provide for consumption by reducing savings. So, if taxation is held in comparison with “permanent income,” it can 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 for a specific good lessens as the amount of personal income increases. Poll taxes (aka head taxes), calculated as a fixed amount per capita, patently are regressive.
It is not simple to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of uncertainty regarding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of deciding who bears the tax burden lays fundamentally on whether a national or a subnational (that is, provincial or state) tax is being considered.
In considering the economic purposes of taxation, it is essential to distinguish between differing points of tax rates. The statutory rates will be dictated in the legislation; generally these are marginal rates, but occasionally they are median rates. Marginal income tax rates denote the fraction of incremental income taken by taxation when income grows by one dollar. Hence, 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 increases. Heavy analysis of marginal tax rates should consider provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lowers by 20 cents for each one-dollar increase in income, the marginal rate is 20 percentage points greater than specified in the statutory rates. Since marginal rates display how after-tax income is changed 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 applied to income from business and capital, because it may depend on such factors as 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 zero under a consumption-based tax.
Average income tax rates indicate the part of total income that is paid in taxation. The pattern of average rates is the one that is in consideration 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 increase with income, both because personal allowances are provided for the taxpayer and dependents and due to that marginal tax rates are graduated; conversely, preferential treatment of income received mostly by high-income households could dwarf these effects, forcing regressivity, as shown by average tax rates that fall as income increases.
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