Proportional, Progressive, and Regressive taxes
Taxes are differentiated by the impact they have on the allocation of income and wealth. A proportional tax is one that impinges the same relative liability on all taxpayers—i.e., when tax liability and income grow in equal scale. A progressive tax is recognised by a more than proportional rise in the tax onus in relation to the growth in income, and a regressive tax is recognisable by a less than proportional growth in the relative onus. Hence, progressive taxes are regarded as removing inequalities in income distribution, whereas regressive taxes might have the result of increasing these inequalities.
The taxes that are normally thought to be progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, may become less so in the upper-income categories—particularly if a taxpayer is allowed to lower his tax base by nominating deductions or by removing some income components from his taxable income. Proportional tax rates if applied to lower-income categories can also be more progressive if such personal exemptions are declared.
Income measured over the course of a given period does not necessarily come up with the best measure of taxpaying ability. For example, transitory increases in income could be saved, and in temporary declines in income a taxpayer could opt to provide for consumption by reducing savings. Thus, if taxation is held in comparison along with “permanent income,” it should be less regressive (or more progressive) than if it is made comparable with annual income.
Sales taxes and excises (excepting luxuries) tend to be regressive, because the share of individual income consumed or spent on a specific good declines as the level of personal income is raised. Poll taxes (also termed head taxes), calculated as a fixed amount per capita, obviously are regressive.
It is hard to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of the lack of certainty about the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating who bears the tax burden depends fundamentally on whether a national or a subnational (that is, provincial or state) tax is being determined.
In regarding the economic effects of taxation, it is important to differentiate between various points of tax rates. The statutory rates will include those nominated in legislature; often these are marginal rates, but for some cases they are average rates. Marginal income tax rates signify the fraction of incremental income demanded by taxation when income grows 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 generally contain graduated marginal rates—i.e., rates that increase as income rises. Structured analysis of marginal tax rates should review provisions apart from the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lowers by 20 cents for each one-dollar increase in income, the marginal rate is 20 percentage points more 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 difficult to nominate the marginal effective tax rate to apply to income from business and capital, as it may rely on considerations 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 nothing under a consumption-based tax.
Average income tax rates signify the fraction of total income that is required 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 grows with income. Average income tax rates usually grow with income, both because personal allowances are allowed for the taxpayer and dependents and because marginal tax rates are graduated; on the flip side, preferential treatment of income received predominantly by high-income households can dampen these effects, producing regressivity, as displayed by average tax rates that lessen as income increases.
For MYOB Brisbane expert advice, contact Stone Consulting today. Stone Consulting also runs MYOB training in Brisbane.
Sphere: Related Content