Proportional, Progressive, and Regressive taxes
Taxes are distinguished by the effect they have on the distribution of income and wealth. A proportional tax is a kind that applies the same relative burden on each taxpayer—i.e., where tax liability and income grow in the same proportion. A progressive tax is characterized by a larger than proportional rise in the tax liability in relation to the growth in income, and a regressive tax is characterizable by a less than proportional increase in the comparative onus. Therefore, progressive taxes are viewed as fighting inequity in income distribution, whereas regressive taxes can 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 nominally progressive, however, could become less so in the upper-income group—in particular if a taxpayer is permitted to reduce his tax base by claiming deductions or by excluding particular income elements from his taxable income. Proportional tax rates which are applied to lower-income groups would also be more progressive if such exemptions of a personal nature are made.
Income measured over the period of a given year may not absolutely offer the best measure of taxpaying requirement. For example, transitory growth in income can be saved, and within temporary declines in income a taxpayer may elect to pay for consumption by decreasing savings. Therefore, if taxation is held in comparison with “permanent income,” it can be less regressive (or more progressive) than if compared with annual income.
Sales taxes and excises (save on luxuries) are mostly regressive, because the spread of own income consumed or spent on a specific good lowers as the rate of personal income grows. Poll taxes (also known as head taxes), calculated as a set amount per capita, obviously are regressive.
It is hard to term 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 debated.
In regarding the economic effects of taxation, it is relevant to differentiate between various points of tax rates. The statutory rates are those dictated in the legislation; often these are marginal rates, but sometimes they are average rates. Marginal income tax rates denote the fraction of incremental income demanded by taxation when income grows by one dollar. Ergo, if tax onus grows by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax legislature generally contain graduated marginal rates—i.e., rates that increase as income rises. Structured analysis of marginal tax rates need to consider provisions in addition to 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 indicated within the statutory rates. Since marginal rates display how after-tax income is changed in response to changes in before-tax income, they are the necessary ones for considering incentive effects of taxation. It is even more difficult to understand the marginal effective tax rate applied to income from business and capital, since it may depend on such factors as 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 zero under a consumption-based tax.
Average income tax rates display the part of total income that is demanded in taxation. The pattern of average rates is the one that is relevant for appraising the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates generally increase with income, both because personal allowances are allowed for the taxpayer and dependents and also due to that marginal tax rates are graduated; on the other side of things, preferential treatment of income received predominantly by high-income households might dampen these effects, allowing regressivity, as displayed by average tax rates that lessen as income grows.
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