Proportional, Progressive, and Regressive taxes
Taxes can be categorized by the impact they have on the placement of income and wealth. A proportional tax is a tax that places the same relative onus on all the taxpayers—i.e., in the case where tax liability and income move in relative scale. A progressive tax is characterized by a more than proportional growth in the tax burden relative to the rise in income, and a regressive tax is characterized by a less than proportional growth in the comparable onus. So, progressive taxes are seen as reducing inequity in income distribution, while regressive taxes are believed to cause an increase in these inequalities.
The taxes that are generally considered progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, could become less so in the upper-income categories—in particular if a taxpayer is permitted to reduce his tax base by claiming deductions or by excluding some particular income aspects from his taxable income. Proportional tax rates when applied to lower-income classes could also be more progressive if such personal exemptions are claimed.
Income measured over a given period might not absolutely come up with the most suitable measure of taxpaying requirements. For example, transitory growth in income may be saved, and in temporary declines in income a taxpayer may opt to provide for consumption by reducing savings. So, if taxation is made comparable along with “permanent income,” it can be less regressive (or more progressive) than when compared with annual income.
Sales taxes and excises (except luxuries) are generally regressive, because the portion of own income consumed or spent on specific goods lowers as the amount of personal income increases. Poll taxes (also known as head taxes), calculated as a standard amount per capita, patently are regressive.
It is complicated to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally due to uncertainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating who bears the tax burden is dependant crucially on whether a national or a subnational (that is, provincial or state) tax is being determined.
In considering the economic effect of taxation, it is important to differentiate between differing ideas of tax rates. The statutory rates will include those dictated in law; commonly these are marginal rates, but sometimes they are mean rates. Marginal income tax rates denote the fraction of incremental income taken by taxation when income increases by one dollar. Thus, if tax liability increases by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax regulations often contain graduated marginal rates—i.e., rates that increase as income rises. Structured analysis of marginal tax rates are required to regard provisions as well as the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lowers by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points greater than specified by the statutory rates. Since marginal rates display 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 difficult to realise the marginal effective tax rate to apply to income from business and capital, because it may be dependant on factors including 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 nothing under a consumption-based tax.
Average income tax rates display the fraction of total income that is paid in taxation. The pattern of average rates is the one that is relevant for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates usually rise with income, both because personal allowances are granted for the taxpayer and dependents and due to that marginal tax rates are graduated; on the other side of things, preferential treatment of income received fundamentally by high-income households might dampen these effects, allowing regressivity, as shown by average tax rates that fall as income grows.
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