08 Jul 10 Proportional, Progressive, and Regressive taxes
Taxes can be differentiated by the impact they have on the placement of income and wealth. A proportional tax is a kind that puts the same relative liability on all taxpayers—i.e., in the case where tax liability and income move in relative levels. A progressive tax is recognised by a larger than proportional growth in the tax burden relative to the rise in income, and a regressive tax is recognisable by a less than proportional increase in the comparative onus. Hence, progressive taxes are thought of as fighting a lack of equality in income distribution, whereas regressive taxes might have the result of 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 initially progressive, however, could become less so for the upper-income class—particularly if a taxpayer is able to reduce his tax base by declaring deductions or by excluding some particular income aspects from his taxable income. Proportional tax rates when 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 period does not absolutely come up with the most appropriate measure of taxpaying requirement. For example, transitory growth in income could be saved, and in temporary declines in income a taxpayer might elect to pay for consumption by reducing savings. So, if taxation is held in comparison along with “permanent income,” it will be less regressive (or more progressive) than when it is made comparable with annual income.
Sales taxes and excises (with the exception of those on luxuries) tend to be regressive, because the spread of personal income consumed or spent for specific goods declines as the amount of personal income increases. Poll taxes (also called head taxes), calculated as a flat amount per capita, patently are regressive.
It is not easy to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of the uncertainty regarding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating 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 decided.
In assessing the economic purpose of taxation, it is essential to differentiate between various points of tax rates. The statutory rates are nominated in legislation; commonly these are marginal rates, but occasionally they are mean rates. Marginal income tax rates note the fraction of incremental income demanded by taxation when income grows by one dollar. Hence, if tax burden grows by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax legislature often contain graduated marginal rates—i.e., rates that grow as income grows. Careful analysis of marginal tax rates should regard provisions other than 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 specified by the statutory rates. Since marginal rates signify how after-tax income changes in response to changes in before-tax income, they are the appropriate 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, since 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 grants that the marginal effective tax rate in income from capital is nil under a consumption-based tax.
Average income tax rates show the fraction of total income that is taken in taxation. The pattern of average rates is the one that is necessary for considering the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates generally 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 side of things, preferential treatment of income received mostly by high-income households could dwarf these effects, allowing regressivity, as displayed by average tax rates that fall as income rises.
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