TCAM

Taxes are categorized by the effect they have on the allocation of income and wealth. A proportional tax is the kind of tax that puts the same relative burden on all taxpayers—i.e., when tax liability and income increase in equal proportion. A progressive tax is characterized by a larger than proportional increase in the tax onus in regard to the growth in income, and a regressive tax is recognisable by a less than proportional rise in the comparative liability. So, progressive taxes are regarded as removing a lack of equality in income distribution, while regressive taxes are found to have the effect of increasing these inequalities.

The taxes that are often believed to be progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, might become less so in the upper-income class—in particular if a taxpayer is allowed to reduce his tax base by declaring deductions or by excluding some certain income aspects from his taxable income. Proportional tax rates when applied to lower-income classes can also be more progressive if personal exemptions are claimed.

Income measured over a given period does not absolutely come up with the most suitable measure of taxpaying requirements. For example, transitory growth in income could be saved, and during temporary declines in income a taxpayer could elect to pay for consumption by reducing savings. Thus, if taxation is held in comparison alongside “permanent income,” it will be less regressive (or more progressive) than when it is compared with annual income.

Sales taxes and excises (excepting luxuries) are usually regressive, because the spread of one’s income consumed or spent for a specific good decreases as the amount of personal income increases. Poll taxes (also known as head taxes), levied as a set amount per capita, clearly are regressive.

It is complicated to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of 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 rests fundamentally on whether a national or a subnational (that is, provincial or state) tax is being considered.

In considering the economic effect of taxation, it is important to distinguish between varied ideas of tax rates. The statutory rates are those specified in legislation; generally speaking these are marginal rates, but occasionally they are average rates. Marginal income tax rates note the fraction of incremental income that is taken by taxation when income rises by one dollar. Ergo, if tax burden increases by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax legislation generally contain graduated marginal rates—i.e., rates that grow as income rises. Careful analysis of marginal tax rates need to regard 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 more than indicated by the statutory rates. Since marginal rates signify how after-tax income is changed in response to changes in before-tax income, they are the necessary ones for regarding incentive effects of taxation. It is even more complicated to realise the marginal effective tax rate applied to income from business and capital, as it may be dependant on factors including 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 show the part of total income that is required 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 grows with income. Average income tax rates commonly increase with income, both because personal allowances are granted for the taxpayer and dependents and also because marginal tax rates are graduated; on the other side of things, preferential treatment of income received fundamentally by high-income households could dampen these effects, allowing regressivity, as indicated by average tax rates that fall as income grows.

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