Proportional, Progressive, and Regressive taxes
Taxes are categorized by the effect they have on the placement of income and wealth. A proportional tax is a kind that imposes the same relative liability on every taxpayer—i.e., when tax liability and income move in the same proportion. A progressive tax is characterizable by a greater than proportional increase in the tax onus in relation to the growth in income, and a regressive tax is characterizable by a less than proportional rise in the relative burden. Therefore, progressive taxes are regarded as removing inequalities in income distribution, but regressive taxes might cause an increase in these inequalities.
The taxes that are generally 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—particularly if a taxpayer is allowed to lessen his tax base by claiming deductions or by excluding some particular income parts from his taxable income. Proportional tax rates that are applied to lower-income demographics would also be more progressive if such exemptions of a personal nature are declared.
Income measured over the course of a given period does not definitely give the most suitable measure of taxpaying ability. For example, transitory increases in income could be saved, and within temporary declines in income a taxpayer may choose to pay for consumption by decreasing savings. Therefore, if taxation is held in comparison along with “permanent income,” it should be less regressive (or more progressive) than when it is made comparable with annual income.
Sales taxes and excises (save on luxuries) tend to be regressive, because the spread of own income consumed or spent for specific goods lessens as the level of personal income increases. Poll taxes (also termed head taxes), nominated as a flat amount per capita, clearly are regressive.
It is not simple to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of uncertainty about 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 assessing the economic purposes of taxation, it is important to distinguish between various points of tax rates. The statutory rates are those dictated in law; generally speaking these are marginal rates, but in some cases they are average 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 increases by one dollar, the marginal tax rate is 45 percent. Income tax statutes often contain graduated marginal rates—i.e., rates that increase as income grows. Careful analysis of marginal tax rates must consider provisions other than the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) reduces by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points more than indicated by the statutory rates. Since marginal rates indicate how after-tax income changes in response to changes in before-tax income, they are the important ones for considering incentive effects of taxation. It is even more complicated to know the marginal effective tax rate applied to income from business and capital, as it may be dependant on considerations such as the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem shows that the marginal effective tax rate in income from capital is zero under a consumption-based tax.
Average income tax rates indicate the fraction of total income that is taken in taxation. The pattern of average rates is the one that is in consideration for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates usually grow with income, both because personal allowances are granted for the taxpayer and dependents and also due to that marginal tax rates are graduated; on the flip side, preferential treatment of income received for the most part by high-income households can dwarf these effects, producing regressivity, as shown by average tax rates that lower as income grows.
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