Proportional, Progressive, and Regressive taxes

Taxes can be categorized by the impact they have on the allocation of income and wealth. A proportional tax is a tax that puts the same relative liability on each taxpayer—i.e., when tax liability and income grow in relative proportion. A progressive tax is characterizable by a larger than proportional rise in the tax liability relative to the increase in income, and a regressive tax is characterized by a less than proportional growth in the comparative burden. Ergo, progressive taxes are regarded as taking away inequity in income distribution, while regressive taxes might have the effect of an increase in these inequalities.

The taxes that are often believed to be progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, might become less so for the upper-income demographic—particularly if a taxpayer is allowed to lessen his tax base by declaring deductions or by removing certain income aspects from his taxable income. Proportional tax rates that are applied to lower-income demographics would also be more progressive if such personal exemptions are declared.

Income measured over the course of a given period does not absolutely come up with the most suitable measure of taxpaying requirements. For example, transitory rises in income may be saved, and in temporary declines in income a taxpayer might decide to provide for consumption by reducing savings. Ergo, if taxation is compared with “permanent income,” it would be less regressive (or more progressive) than if made comparable with annual income.

Sales taxes and excises (save those on luxuries) are usually regressive, because the dissemination of individual income consumed or spent on a specific good lessens as the amount of personal income rises. Poll taxes (also called head taxes), nominated as a flat amount per capita, obviously are regressive.

It is hard to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally due to a lack of certainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating who bears the tax burden is dependant for the most part on whether a national or a subnational (that is, provincial or state) tax is being considered.

In regarding the economic effect of taxation, it is relevant to differentiate between various concepts of tax rates. The statutory rates are those specified in law; generally speaking these are marginal rates, but occasionally they are mean rates. Marginal income tax rates signify the fraction of incremental income demanded by taxation when income increases by one dollar. Thus, if tax liability grows by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax legislation commonly contain graduated marginal rates—i.e., rates that increase as income grows. Heavy analysis of marginal tax rates need to consider provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lessens by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points higher than nominated in the statutory rates. Since marginal rates specify how after-tax income is changed in response to changes in before-tax income, they are the necessary ones for appraising incentive effects of taxation. It is even more complicated to nominate the marginal effective tax rate applicable to income from business and capital, since it may be dependant on such factors as 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 signify the fraction of total income that is paid 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 commonly rise 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 predominantly by high-income households can dwarf these effects, producing regressivity, as signified by average tax rates that lower as income grows.

For MYOB Brisbane expert advice, contact Stone Consulting today. Stone Consulting also runs MYOB training in Brisbane.