Proportional, Progressive, and Regressive taxes
Taxes are categorized by the impact they have on the allocation of income and wealth. A proportional tax is the kind that places the same relative requirement on all taxpayers—i.e., in the case where tax liability and income move in the same proportion. A progressive tax is characterizable by a greater than proportional growth in the tax burden in regard to the increase in income, and a regressive tax is recognisable by a less than proportional growth in the related liability. Therefore, progressive taxes are seen as fighting a lack of equality in income distribution, whereas regressive taxes can have the effect of an increase in these inequalities.
The taxes that are normally believed to be progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, could become less so in the upper-income class—especially if a taxpayer is permitted to reduce his tax base by declaring deductions or by excluding some income aspects from his taxable income. Proportional tax rates when applied to lower-income groups will also be more progressive if such exemptions of a personal nature are claimed.
Income measured over a given period might not absolutely give the most appropriate measure of taxpaying ability. For example, transitory increases in income might be saved, and within temporary declines in income a taxpayer might choose to finance consumption by decreasing savings. So, if taxation is made comparable with “permanent income,” it should be less regressive (or more progressive) than when held in comparison with annual income.
Sales taxes and excises (save luxuries) tend to be regressive, because the portion of individual income consumed or spent for specific goods lowers as the rate of personal income is raised. Poll taxes (also called head taxes), levied as a fixed amount per capita, clearly are regressive.
It is not simple to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to a lack of certainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of deciding who bears the tax burden depends for the most part on whether a national or a subnational (that is, provincial or state) tax is being decided.
In considering the economic effect of taxation, it is essential to differentiate between various ideas of tax rates. The statutory rates will be nominated in law; often these are marginal rates, but sometimes they are median rates. Marginal income tax rates signify the fraction of incremental income demanded by taxation when income grows by one dollar. Hence, if tax liability increases by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax regulations often contain graduated marginal rates—i.e., rates that increase as income grows. Heavy analysis of marginal tax rates are required 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 increase in income, the marginal rate is 20 percentage points higher than nominated within the statutory rates. Since marginal rates indicate 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 difficult to know the marginal effective tax rate to apply to income from business and capital, since it may be dependant 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 nothing under a consumption-based tax.
Average income tax rates determine the fraction of total income that is taken in taxation. The pattern of average rates is the one that is important for judging the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates commonly rise with income, both because personal allowances are provided for the taxpayer and dependents and due to that marginal tax rates are graduated; on the other hand, preferential treatment of income received mostly by high-income households can dwarf these effects, producing regressivity, as indicated by average tax rates that decrease as income rises.
For MYOB Brisbane expert advice, contact Stone Consulting today. Stone Consulting also runs MYOB training in Brisbane.
Sphere: Related ContentComments
Tell me what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!