Proportional, Progressive, and Regressive taxes

Taxes are distinguished by the effect they have on the allocation of income and wealth. A proportional tax is the kind of tax that imposes the same relative requirement on each taxpayer—i.e., in the case where tax liability and income grow in the same scale. A progressive tax is recognised by a more than proportional growth in the tax burden relative to the increase in income, and a regressive tax is characterized by a less than proportional increase in the relative onus. Therefore, progressive taxes are viewed as taking away the lack of equality in income distribution, whereas regressive taxes are found to result in an increase these inequalities.

The taxes that are generally thought to be progressive include individual income taxes and estate taxes. Income taxes that are declarably progressive, however, can become less so for the upper-income demographic—in particular if a taxpayer is able to reduce his tax base by declaring deductions or by leaving out some income parts from his taxable income. Proportional tax rates which are applied to lower-income groups can also be more progressive if exemptions of a personal nature are claimed.

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

Sales taxes and excises (excepting those on luxuries) are mostly regressive, because the share of personal income consumed or spent for specific goods lowers as the level of personal income grows. Poll taxes (aka head taxes), nominated as a standard amount per capita, clearly are regressive.

It is difficult to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to the uncertainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of dictating 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 analysing the economic purposes of taxation, it is important to distinguish between varied ideas of tax rates. The statutory rates include those nominated in the law; often these are marginal rates, but occasionally they are mean rates. Marginal income tax rates note the fraction of incremental income that is taken by taxation when income rises by one dollar. Therefore, if tax burden grows by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax regulations usually contain graduated marginal rates—i.e., rates that rise as income rises. Structured analysis of marginal tax rates are required to regard provisions apart from the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lowers by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points greater than indicated by 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 appraising incentive effects of taxation. It is even more complicated to understand the marginal effective tax rate applicable to income from business and capital, as it may rely on factors including 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 nothing under a consumption-based tax.

Average income tax rates determine the portion of total income that is paid in taxation. The pattern of average rates is the one that is necessary for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates commonly grow with income, both because personal allowances are permitted for the taxpayer and dependents and also because marginal tax rates are graduated; conversely, preferential treatment of income received predominantly by high-income households might swamp these effects, allowing regressivity, as shown by average tax rates that decrease as income rises.

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