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 the kind of tax that applies the same relative burden on all the taxpayers—i.e., when tax liability and income grow in equal levels. A progressive tax is recognisable by a higher than proportional growth in the tax liability in regard to the rise in income, and a regressive tax is characterized by a less than proportional rise in the related onus. Hence, progressive taxes are viewed as reducing inequalities in income distribution, while regressive taxes are believed to have the result of increasing 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, might become less so within the upper-income class—particularly if a taxpayer is permitted to reduce his tax base by declaring deductions or by leaving out certain income elements from his taxable income. Proportional tax rates which are applied to lower-income demographics would also be more progressive if exemptions of a personal nature are made.
Income measured over a given year might not necessarily give the most accurate measure of taxpaying status. For example, transitory rises in income might be saved, and during temporary declines in income a taxpayer may opt to finance consumption by decreasing savings. Therefore, if taxation is made comparable alongside “permanent income,” it will be less regressive (or more progressive) than when it is held in comparison with annual income.
Sales taxes and excises (save those on luxuries) are mostly regressive, because the spread of own income consumed or spent on a specific good decreases as the level of personal income is raised. Poll taxes (aka head taxes), levied as a set amount per capita, clearly are regressive.
It is difficult to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of uncertainty surrounding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of deciding who bears the tax burden rests fundamentally on whether a national or a subnational (that is, provincial or state) tax is being debated.
In assessing the economic effect of taxation, it is relevant to distinguish between varied ideas of tax rates. The statutory rates will be dictated in law; generally speaking these are marginal rates, but sometimes they are average rates. Marginal income tax rates note the fraction of incremental income that is taken by taxation when income is increased by one dollar. Therefore, if tax onus grows by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax legislature often contain graduated marginal rates—i.e., rates that rise as income increases. Careful analysis of marginal tax rates should take into account provisions as well as the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) reduces by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points higher than specified within the statutory rates. Since marginal rates specify how after-tax income moves in response to changes in before-tax income, they are the relevant ones for assessing incentive effects of taxation. It is even more difficult to nominate the marginal effective tax rate applied to income from business and capital, because it may depend 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 nil under a consumption-based tax.
Average income tax rates display the fraction of total income that is demanded in taxation. The pattern of average rates is the one that is in consideration for judging the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates usually grow with income, both because personal allowances are granted for the taxpayer and dependents and due to that marginal tax rates are graduated; on the flip side, preferential treatment of income received fundamentally by high-income households could dwarf these effects, allowing regressivity, as indicated by average tax rates that lessen as income rises.
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