Proportional, Progressive, and Regressive taxes
Taxes are categorized by the effect they have on the distribution of income and wealth. A proportional tax is one that imposes the same relative burden on all taxpayers—i.e., in the case where tax liability and income grow in equal scale. A progressive tax is characterizable by a more than proportional rise in the tax liability relative to the rise in income, and a regressive tax is characterized by a less than proportional rise in the relative liability. Ergo, progressive taxes are viewed as reducing the lack of equality in income distribution, while regressive taxes are believed to have the result of an increase in these inequalities.
The taxes that are generally believed to be progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, can become less so in the upper-income categories—particularly if a taxpayer is able to reduce his tax base by nominating deductions or by excluding particular income components from his taxable income. Proportional tax rates which are applied to lower-income groups can also be more progressive if such personal exemptions are claimed.
Income measured over a given period does not absolutely offer the most accurate measure of taxpaying status. For example, transitory increases in income can be saved, and in temporary declines in income a taxpayer could decide to provide for consumption by taking from savings. So, if taxation is regarded along with “permanent income,” it would be less regressive (or more progressive) than if held in comparison with annual income.
Sales taxes and excises (excepting luxuries) are generally regressive, because the share of one’s income consumed or spent for a specific good declines as the rate of personal income is raised. Poll taxes (also called head taxes), levied as a flat amount per capita, clearly are regressive.
It is not simple to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of uncertainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of dictating who bears the tax burden lays crucially on whether a national or a subnational (that is, provincial or state) tax is being determined.
In assessing the economic effects of taxation, it is essential to differentiate between several ideas of tax rates. The statutory rates will include those specified in the law; often these are marginal rates, but sometimes they are median rates. Marginal income tax rates note the fraction of incremental income demanded by taxation when income increases by one dollar. Therefore, if tax burden increases by 45 cents when income grows 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. Structured analysis of marginal tax rates are required to regard 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 growth in income, the marginal rate is 20 percentage points higher than nominated in the statutory rates. Since marginal rates display 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 complicated to understand the marginal effective tax rate applied to income from business and capital, as it may be reliant on such considerations 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 nil under a consumption-based tax.
Average income tax rates signify the portion of total income that is demanded in taxation. The pattern of average rates is the one that is important for considering the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates usually grow with income, both because personal allowances are allowed for the taxpayer and dependents and because marginal tax rates are graduated; on the other side of things, preferential treatment of income received predominantly by high-income households might dampen these effects, allowing regressivity, as indicated by average tax rates that fall as income grows.
For MYOB Brisbane expert advice, contact Stone Consulting today. Stone Consulting also runs MYOB training in Brisbane.
Sphere: Related Content