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 tax that places the same relative liability on each taxpayer—i.e., when tax liability and income move in the same scale. A progressive tax is characterizable by a more than proportional increase in the tax onus in relation to the increase in income, and a regressive tax is recognisable by a less than proportional growth in the related burden. Hence, progressive taxes are seen as fighting inequalities in income distribution, while regressive taxes are seen to cause an increase in these inequalities.
The taxes that are usually considered progressive include individual income taxes and estate taxes. Income taxes that are declarably progressive, however, could become less so for the upper-income demographic—in particular if a taxpayer is able to lower his tax base by nominating deductions or by leaving out some particular income aspects from his taxable income. Proportional tax rates that are applied to lower-income categories could also be more progressive if exemptions of a personal nature are made.
Income measured over a given year may not necessarily come up with the most accurate measure of taxpaying status. For example, transitory growth in income may be saved, and within temporary declines in income a taxpayer could decide to pay for consumption by decreasing savings. So, if taxation is held in comparison along with “permanent income,” it can be less regressive (or more progressive) than if held in comparison with annual income.
Sales taxes and excises (save those on luxuries) are mostly regressive, because the spread of personal income consumed or spent on a specific good lowers as the rate of personal income is raised. Poll taxes (also termed head taxes), levied as a standard amount per capita, obviously are regressive.
It is not simple to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to the uncertainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of dictating who bears the tax burden rests for the most part on whether a national or a subnational (that is, provincial or state) tax is being debated.
In regarding the economic purpose of taxation, it is essential to differentiate between differing concepts of tax rates. The statutory rates are those dictated in legislature; commonly these are marginal rates, but sometimes they are mean rates. Marginal income tax rates indicate the fraction of incremental income that is taken by taxation when income grows by one dollar. Therefore, if tax burden grows 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 increases. Careful analysis of marginal tax rates are required to regard provisions apart from the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) decreases by 20 cents for each one-dollar increase in income, the marginal rate is 20 percentage points greater than nominated within the statutory rates. Since marginal rates signify how after-tax income changes in response to changes in before-tax income, they are the necessary ones for regarding incentive effects of taxation. It is even more complicated to nominate the marginal effective tax rate to apply to income from business and capital, since it may be dependant 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 show the portion 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 grow with income, both because personal allowances are provided for the taxpayer and dependents and due to that marginal tax rates are graduated; on the other hand, preferential treatment of income received predominantly by high-income households may dampen these effects, producing regressivity, as signified by average tax rates that fall as income rises.
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