Proportional, Progressive, and Regressive taxes
Taxes are categorized by the effect they have on the placement of income and wealth. A proportional tax is the kind of tax that applies the same relative burden on all the taxpayers—i.e., where tax liability and income move in equal proportion. A progressive tax is characterizable by a larger than proportional rise in the tax burden relative to the growth in income, and a regressive tax is recognised by a less than proportional rise in the comparable burden. Therefore, progressive taxes are regarded as reducing inequity in income distribution, while regressive taxes are believed to have the effect of increasing these inequalities.
The taxes that are normally considered progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, could become less so for the upper-income class—especially if a taxpayer is allowed to lessen his tax base by declaring deductions or by leaving out some income elements from his taxable income. Proportional tax rates if applied to lower-income demographics will also be more progressive if such exemptions of a personal nature are declared.
Income measured over a given period does not necessarily offer the most suitable measure of taxpaying requirements. For example, transitory increases in income could be saved, and within temporary declines in income a taxpayer could choose to provide for consumption by reducing savings. Thus, if taxation is made comparable with “permanent income,” it can be less regressive (or more progressive) than when made comparable with annual income.
Sales taxes and excises (with the exception of luxuries) are usually regressive, because the dissemination of personal income consumed or spent for specific goods lowers as the amount of personal income increases. Poll taxes (aka head taxes), nominated as a standard amount per capita, patently are regressive.
It is not easy to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally due to uncertainty about the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of determining who bears the tax burden depends crucially on whether a national or a subnational (that is, provincial or state) tax is being debated.
In regarding the economic purposes of taxation, it is necessary to differentiate between several points of tax rates. The statutory rates include those specified in the legislation; commonly these are marginal rates, but sometimes they are median rates. Marginal income tax rates note the fraction of incremental income taken by taxation when income increases by one dollar. Therefore, if tax liability rises by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax statutes often contain graduated marginal rates—i.e., rates that grow as income increases. Heavy analysis of marginal tax rates need to review provisions other than the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) falls by 20 cents for each one-dollar increase in income, the marginal rate is 20 percentage points more than indicated by the statutory rates. Since marginal rates specify how after-tax income changes in response to changes in before-tax income, they are the important ones for assessing incentive effects of taxation. It is even more complicated to realise the marginal effective tax rate applicable to income from business and capital, since it may be reliant on considerations including 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 zero under a consumption-based tax.
Average income tax rates determine the part of total income that is required 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 grows with income. Average income tax rates commonly rise with income, both because personal allowances are permitted for the taxpayer and dependents and due to that marginal tax rates are graduated; on the other hand, preferential treatment of income received for the most part by high-income households can dwarf these effects, producing regressivity, as displayed by average tax rates that lessen as income increases.
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