Proportional, Progressive, and Regressive taxes

Taxes are categorized by the impact they have on the allocation of income and wealth. A proportional tax is a kind that imposes the same relative liability on every taxpayer—i.e., in the case where tax liability and income grow in relative scale. A progressive tax is recognised by a more than proportional growth in the tax onus relative to the increase in income, and a regressive tax is recognisable by a less than proportional increase in the comparative burden. Therefore, progressive taxes are seen as removing the lack of equality in income distribution, but regressive taxes might have the result of increasing these inequalities.

The taxes that are usually considered progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, may become less so within the upper-income class—especially if a taxpayer is permitted to lessen his tax base by declaring deductions or by taking some income aspects from his taxable income. Proportional tax rates which are applied to lower-income classes can also be more progressive if exemptions of a personal nature are claimed.

Income measured over the course of a given period might not definitely provide the most suitable measure of taxpaying ability. For example, transitory increases in income may be saved, and during temporary declines in income a taxpayer could opt to provide for consumption by taking from savings. So, if taxation is made comparable along with “permanent income,” it would be less regressive (or more progressive) than when it is compared with annual income.

Sales taxes and excises (with the exception of luxuries) are generally regressive, because the spread of own income consumed or spent for a specific good declines as the level of personal income grows. Poll taxes (also known as head taxes), calculated as a fixed amount per capita, clearly are regressive.

It is not easy to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to the lack of certainty 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 for the most part on whether a national or a subnational (that is, provincial or state) tax is being decided.

In assessing the economic effects of taxation, it is important to distinguish between several ideas of tax rates. The statutory rates will be nominated in law; often these are marginal rates, but occasionally they are median rates. Marginal income tax rates indicate the fraction of incremental income taken by taxation when income is increased by one dollar. Hence, if tax burden increases by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax legislation usually contain graduated marginal rates—i.e., rates that rise as income increases. Heavy 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) decreases by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points higher than nominated within the statutory rates. Since marginal rates display how after-tax income increases or decreases in response to changes in before-tax income, they are the relevant ones for assessing incentive effects of taxation. It is even more complicated to realise the marginal effective tax rate applied to income from business and capital, since 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 holds that the marginal effective tax rate in income from capital is zero under a consumption-based tax.

Average income tax rates signify the fraction of total income that is paid in taxation. The pattern of average rates is the one that is relevant for judging the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates generally grow with income, both because personal allowances are permitted for the taxpayer and dependents and also because marginal tax rates are graduated; on the flip side, preferential treatment of income received mostly by high-income households could dwarf these effects, allowing regressivity, as displayed by average tax rates that decrease as income increases.

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