Proportional, Progressive, and Regressive taxes

Taxes are differentiated by the impact they have on the placement of income and wealth. A proportional tax is a kind that applies the same relative liability on all taxpayers—i.e., in the case where tax liability and income increase in equal scale. A progressive tax is characterized by a larger than proportional increase in the tax onus in regard to the rise in income, and a regressive tax is characterized by a less than proportional rise in the comparative liability. Ergo, progressive taxes are thought of as reducing the lack of equality in income distribution, but regressive taxes are believed to have the effect of an increase in these inequalities.

The taxes that are often thought to be progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, might become less so for the upper-income demographic—particularly if a taxpayer is able to lessen his tax base by nominating deductions or by removing certain income parts from his taxable income. Proportional tax rates if applied to lower-income categories could also be more progressive if such exemptions of a personal nature are declared.

Income measured over a given period might not necessarily give the best measure of taxpaying requirements. For example, transitory rises in income can be saved, and within temporary declines in income a taxpayer might elect to finance consumption by reducing savings. Ergo, if taxation is regarded along with “permanent income,” it would be less regressive (or more progressive) than if compared with annual income.

Sales taxes and excises (excepting luxuries) are generally regressive, because the dissemination of personal income consumed or spent for a specific good lowers as the level of personal income increases. Poll taxes (also termed head taxes), nominated as a standard amount per capita, clearly are regressive.

It is not simple to classify corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to a lack of certainty about the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of deciding who bears the tax burden is dependant crucially on whether a national or a subnational (that is, provincial or state) tax is being determined.

In assessing the economic effects of taxation, it is relevant to distinguish between differing points of tax rates. The statutory rates will include those nominated in the law; generally these are marginal rates, but sometimes they are average rates. Marginal income tax rates signify the fraction of incremental income demanded by taxation when income is increased by one dollar. Therefore, if tax onus grows by 45 cents when income rises 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 are required to review provisions apart from 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 specified within the statutory rates. Since marginal rates display how after-tax income moves in response to changes in before-tax income, they are the appropriate ones for considering incentive effects of taxation. It is even more complicated to know the marginal effective tax rate to apply to income from business and capital, since 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 shows that the marginal effective tax rate in income from capital is zero under a consumption-based tax.

Average income tax rates show the portion of total income that is taken 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 increases with income. Average income tax rates generally increase with income, both because personal allowances are allowed for the taxpayer and dependents and due to that marginal tax rates are graduated; on the other hand, preferential treatment of income received predominantly by high-income households might dwarf these effects, producing regressivity, as displayed by average tax rates that lower as income grows.

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