Proportional, Progressive, and Regressive taxes
Filed Under Uncategorized
Taxes are categorized by the effect they have on the distribution of income and wealth. A proportional tax is a kind that impinges the same relative burden on all taxpayers—i.e., when tax liability and income move in the same proportion. A progressive tax is recognised by a greater than proportional growth in the tax burden relative to the rise in income, and a regressive tax is characterized by a less than proportional increase in the related onus. So, progressive taxes are seen as reducing a lack of equality in income distribution, but regressive taxes may result in increasing these inequalities.
The taxes that are often considered progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, could become less so within the upper-income class—in particular if a taxpayer is able to reduce his tax base by claiming deductions or by excluding certain income components from his taxable income. Proportional tax rates when applied to lower-income demographics will also be more progressive if such exemptions of a personal nature are made.
Income measured over the period of a given year does not absolutely provide the best measure of taxpaying ability. For example, transitory increases in income may be saved, and in temporary declines in income a taxpayer might decide to pay for consumption by reducing savings. Therefore, if taxation is compared alongside “permanent income,” it would be less regressive (or more progressive) than when made comparable with annual income.
Sales taxes and excises (save those on luxuries) are usually regressive, because the portion of personal income consumed or spent on specific goods lowers as the level of personal income grows. Poll taxes (also termed head taxes), nominated as a set amount per capita, patently are regressive.
It is not simple to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to the lack of certainty regarding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of deciding who bears the tax burden lays fundamentally on whether a national or a subnational (that is, provincial or state) tax is being determined.
In assessing the economic purpose of taxation, it is necessary to differentiate between differing concepts of tax rates. The statutory rates are those specified in law; often these are marginal rates, but for some cases they are average rates. Marginal income tax rates denote the fraction of incremental income demanded by taxation when income increases by one dollar. So, if tax liability grows by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax legislation generally contain graduated marginal rates—i.e., rates that rise as income grows. Careful 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) reduces by 20 cents for each one-dollar increase in income, the marginal rate is 20 percentage points greater than specified in the statutory rates. Since marginal rates indicate how after-tax income changes 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 nominate the marginal effective tax rate to apply to income from business and capital, since it may depend 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 zero under a consumption-based tax.
Average income tax rates display the percentage of total income that is paid in taxation. The pattern of average rates is the one that is necessary for judging the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates usually rise with income, both because personal allowances are provided for the taxpayer and dependents and because marginal tax rates are graduated; on the other hand, preferential treatment of income received predominantly by high-income households might dwarf these effects, forcing regressivity, as shown by average tax rates that lower as income grows.
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