Proportional, Progressive, And Regressive Taxes

By Author: Roger Banks
Total Articles: 4762
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Taxes are differentiated by the effect they have on the distribution of income and wealth. A proportional tax is the kind that impinges the same relative onus on each taxpayerâ€i.e., in the case where tax liability and income move in the same levels. A progressive tax is characterizable by a higher than proportional growth in the tax onus in regard to the rise in income, and a regressive tax is characterized by a less than proportional growth in the comparable onus. So, progressive taxes are thought of as fighting a lack of equality in income distribution, while regressive taxes may 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 declarably progressive, however, may become less so for the upper-income demographicâ€especially if a taxpayer is permitted to lower his tax base by declaring deductions or by leaving out some particular income elements from his taxable income. Proportional tax rates that are applied to lower-income groups could also be more progressive if such personal ...
... exemptions are made.
Income measured over the course of a given period does not definitely provide the best measure of taxpaying requirement. For example, transitory increases in income may be saved, and during temporary declines in income a taxpayer might choose to pay for consumption by taking from savings. Therefore, if taxation is compared alongside "permanent income," it should be less regressive (or more progressive) than if it is compared with annual income.
Sales taxes and excises (save those on luxuries) are mostly regressive, because the dissemination of individual income consumed or spent for a specific good decreases as the rate of personal income is raised. Poll taxes (also called head taxes), calculated as a flat amount per capita, clearly are regressive.
It is hard to dictate 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 nominating who bears the tax burden lays for the most part on whether a national or a subnational (that is, provincial or state) tax is being considered.
In assessing the economic effect of taxation, it is necessary to distinguish between varied concepts of tax rates. The statutory rates will be dictated in law; often these are marginal rates, but for some cases they are median rates. Marginal income tax rates denote the fraction of incremental income demanded by taxation when income rises 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 commonly contain graduated marginal ratesâ€i.e., rates that rise as income grows. Careful analysis of marginal tax rates must review provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) falls by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points higher than nominated in the statutory rates. Since marginal rates indicate how after-tax income increases or decreases in response to changes in before-tax income, they are the relevant ones for appraising incentive effects of taxation. It is even more difficult to know the marginal effective tax rate applied to income from business and capital, because it may rely on considerations 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 nil under a consumption-based tax.
Average income tax rates determine the fraction of total income that is paid in taxation. The pattern of average rates is the one that is important for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates generally rise with income, both because personal allowances are provided for the taxpayer and dependents and due to that marginal tax rates are graduated; conversely, preferential treatment of income received fundamentally by high-income households can swamp these effects, producing regressivity, as shown by average tax rates that lessen as income grows.
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