The Slagosphere

Taxes can be differentiated by the effect they have on the placement of income and wealth. A proportional tax is one that impinges the same relative onus on all the taxpayers—i.e., where tax liability and income increase in the same levels. A progressive tax is characterized by a larger than proportional rise in the tax burden in relation to the growth in income, and a regressive tax is recognised by a less than proportional rise in the comparable liability. Thus, progressive taxes are regarded as taking away a lack of equality in income distribution, whereas regressive taxes are seen to have the effect of an increase in these inequalities.

The taxes that are normally regarded as progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, might become less so within the upper-income categories—especially if a taxpayer is able to reduce his tax base by declaring deductions or by removing some certain income components from his taxable income. Proportional tax rates that are applied to lower-income groups can also be more progressive if such personal exemptions are claimed.

Income measured over a given year does not definitely offer the most appropriate measure of taxpaying requirement. For example, transitory increases in income can be saved, and within temporary declines in income a taxpayer might elect to finance consumption by taking from savings. Ergo, if taxation is held in comparison with “permanent income,” it can be less regressive (or more progressive) than if compared with annual income.

Sales taxes and excises (excepting those on luxuries) are usually regressive, because the share of personal income consumed or spent for a specific good decreases as the rate of personal income rises. Poll taxes (also termed head taxes), nominated as a standard amount per capita, patently are regressive.

It is not easy to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of the lack of certainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of dictating who bears the tax burden depends essentially on whether a national or a subnational (that is, provincial or state) tax is being decided.

In regarding the economic purpose of taxation, it is relevant to distinguish between varied ideas of tax rates. The statutory rates will be dictated in legislation; usually these are marginal rates, but sometimes they are median rates. Marginal income tax rates note the fraction of incremental income taken by taxation when income grows by one dollar. So, if tax liability grows by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax laws generally contain graduated marginal rates—i.e., rates that increase as income grows. Heavy analysis of marginal tax rates must consider provisions apart from the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) declines by 20 cents for each one-dollar increase in income, the marginal rate is 20 percentage points greater than specified within the statutory rates. Since marginal rates indicate how after-tax income changes in response to changes in before-tax income, they are the appropriate ones for regarding 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 depend on such considerations as the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem grants that the marginal effective tax rate in income from capital is zero under a consumption-based tax.

Average income tax rates display the part of total income that is required 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 grows with income. Average income tax rates commonly grow with income, both because personal allowances are permitted 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 could dwarf these effects, allowing regressivity, as indicated by average tax rates that lower as income rises.

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