Proportional, Progressive, and Regressive taxes
Taxes are differentiated by the impact they have on the placement of income and wealth. A proportional tax is a kind that imposes the same relative onus on all taxpayers—i.e., when tax liability and income move in relative levels. A progressive tax is characterizable by a higher than proportional increase in the tax onus in regard to the increase in income, and a regressive tax is recognisable by a less than proportional increase in the comparative liability. So, progressive taxes are viewed as fighting inequity in income distribution, whereas regressive taxes are found to have the effect of an increase in these inequalities.
The taxes that are normally regarded as progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, could become less so within the upper-income class—in particular if a taxpayer is allowed to lower his tax base by nominating deductions or by taking some particular income parts from his taxable income. Proportional tax rates that are applied to lower-income classes can also be more progressive if such exemptions of a personal nature are made.
Income measured over the period of a year may not necessarily give the most appropriate measure of taxpaying requirements. For example, transitory rises in income might be saved, and within temporary declines in income a taxpayer might select to provide for consumption by decreasing savings. Therefore, if taxation is made comparable with “permanent income,” it would be less regressive (or more progressive) than when it is compared with annual income.
Sales taxes and excises (with the exception of those on luxuries) are usually regressive, because the share of one’s income consumed or spent for specific goods decreases as the amount of personal income grows. Poll taxes (also called head taxes), nominated as a flat amount per capita, obviously are regressive.
It is difficult to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to the 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 is dependant fundamentally on whether a national or a subnational (that is, provincial or state) tax is being determined.
In assessing the economic purposes of taxation, it is relevant to differentiate between several ideas of tax rates. The statutory rates are those dictated in the legislation; generally these are marginal rates, but in some cases they are average rates. Marginal income tax rates indicate the fraction of incremental income taken by taxation when income grows by one dollar. Thus, if tax liability rises by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax statutes generally contain graduated marginal rates—i.e., rates that rise as income grows. Heavy analysis of marginal tax rates should regard provisions apart from the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lessens by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points higher than nominated in the statutory rates. Since marginal rates display how after-tax income changes in response to changes in before-tax income, they are the relevant ones for considering incentive effects of taxation. It is even more difficult to know the marginal effective tax rate applied to income from business and capital, as it may be reliant on factors such 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 nil under a consumption-based tax.
Average income tax rates determine the part of total income that is demanded 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 grows with income. Average income tax rates usually grow with income, both because personal allowances are provided for the taxpayer and dependents and also due to that marginal tax rates are graduated; on the other hand, preferential treatment of income received predominantly by high-income households could dampen these effects, allowing regressivity, as displayed by average tax rates that decrease as income increases.
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