Proportional, Progressive, and Regressive taxes

Taxes are distinguished by the effect they have on the placement of income and wealth. A proportional tax is the kind of tax that places the same relative liability on all the taxpayers—i.e., where tax liability and income move in the same scale. A progressive tax is recognisable by a greater than proportional rise in the tax liability in regard to the growth in income, and a regressive tax is characterizable by a less than proportional rise in the relative onus. So, progressive taxes are regarded as removing a lack of equality in income distribution, while regressive taxes can increase these inequalities.

The taxes that are generally regarded as progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, might become less so in the upper-income categories—in particular if a taxpayer is able to lessen his tax base by nominating deductions or by excluding some particular income aspects from his taxable income. Proportional tax rates when applied to lower-income groups can also be more progressive if such personal exemptions are claimed.

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

Sales taxes and excises (excepting luxuries) tend to be regressive, because the spread of individual income consumed or spent on a specific good decreases as the level of personal income rises. Poll taxes (also known as head taxes), nominated as a standard amount per capita, patently are regressive.

It is hard to classify corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of the uncertainty surrounding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of deciding 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 decided.

In analysing the economic effects of taxation, it is essential to distinguish between differing ideas of tax rates. The statutory rates are specified in the legislation; generally these are marginal rates, but in some cases they are median rates. Marginal income tax rates signify the fraction of incremental income taken by taxation when income is increased by one dollar. Ergo, if tax liability grows by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax regulations often contain graduated marginal rates—i.e., rates that rise as income grows. Structured analysis of marginal tax rates must take into account provisions other than the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) declines by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points higher than nominated in the statutory rates. Since marginal rates signify how after-tax income changes 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 realise the marginal effective tax rate applicable to income from business and capital, since it may be dependant on such considerations as 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 signify the fraction of total income that is demanded in taxation. The pattern of average rates is the one that is in consideration for considering the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates usually grow with income, both because personal allowances are permitted 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 might dwarf these effects, forcing regressivity, as displayed by average tax rates that fall as income increases.

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