Proportional, Progressive, and Regressive taxes

Taxes can be distinguished by the impact they have on the allocation of income and wealth. A proportional tax is a tax that imposes the same relative liability on all the taxpayers—i.e., in the case where tax liability and income grow in the same levels. A progressive tax is characterized by a more than proportional growth in the tax burden in relation to the growth in income, and a regressive tax is characterizable by a less than proportional growth in the comparative liability. Therefore, progressive taxes are viewed as reducing inequalities in income distribution, whereas regressive taxes may result in increasing 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, could become less so for the upper-income demographic—in particular if a taxpayer is able to lessen his tax base by claiming deductions or by removing certain income aspects from his taxable income. Proportional tax rates that are applied to lower-income categories will also be more progressive if such personal exemptions are claimed.

Income measured over the period of a year might not definitely come up with the most suitable measure of taxpaying status. For example, transitory rises in income may be saved, and in temporary declines in income a taxpayer could choose to provide for consumption by decreasing savings. So, if taxation is held in comparison alongside “permanent income,” it will be less regressive (or more progressive) than when compared with annual income.

Sales taxes and excises (save those on luxuries) are usually regressive, because the share of one’s income consumed or spent for a specific good lowers as the amount of personal income is raised. 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 around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of determining who bears the tax burden is dependant fundamentally on whether a national or a subnational (that is, provincial or state) tax is being considered.

In considering the economic effects of taxation, it is essential to distinguish between varied concepts of tax rates. The statutory rates will be specified in legislature; commonly these are marginal rates, but for some cases they are average rates. Marginal income tax rates note the fraction of incremental income taken by taxation when income is increased by one dollar. Therefore, if tax liability increases 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 increase as income grows. Heavy analysis of marginal tax rates are required to take into account provisions other than the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lowers by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points higher than indicated in the statutory rates. Since marginal rates display how after-tax income is changed in response to changes in before-tax income, they are the important ones for assessing incentive effects of taxation. It is even more difficult to know the marginal effective tax rate applicable to income from business and capital, since it may be reliant on considerations 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 nil under a consumption-based tax.

Average income tax rates display the percentage of total income that is demanded 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 increases with income. Average income tax rates generally increase with income, both because personal allowances are allowed for the taxpayer and dependents and also because marginal tax rates are graduated; on the other side of things, preferential treatment of income received mostly by high-income households can dwarf these effects, forcing regressivity, as shown by average tax rates that lower as income rises.

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