Proportional, Progressive, and Regressive taxes
Taxes are differentiated by the effect they have on the allocation of income and wealth. A proportional tax is a kind that applies the same relative onus on each taxpayer—i.e., when tax liability and income increase in equal scale. A progressive tax is characterized by a higher than proportional rise in the tax burden in relation to the increase in income, and a regressive tax is recognisable by a less than proportional rise in the relative burden. Hence, progressive taxes are regarded as removing inequalities in income distribution, whereas regressive taxes are seen to have the result of increasing these inequalities.
The taxes that are usually considered progressive include individual income taxes and estate taxes. Income taxes that are declarably progressive, however, can become less so within the upper-income class—particularly if a taxpayer is permitted to lower his tax base by claiming deductions or by taking particular income aspects from his taxable income. Proportional tax rates if applied to lower-income categories could also be more progressive if exemptions of a personal nature are claimed.
Income measured over a given period does not necessarily offer the most suitable measure of taxpaying status. For example, transitory rises in income may be saved, and within temporary declines in income a taxpayer may decide to pay for consumption by reducing savings. So, if taxation is held in comparison with “permanent income,” it would be less regressive (or more progressive) than when made comparable with annual income.
Sales taxes and excises (save those on luxuries) are generally regressive, because the portion of own income consumed or spent for specific goods declines as the rate of personal income rises. Poll taxes (also termed head taxes), nominated as a standard amount per capita, obviously are regressive.
It is complicated to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of the uncertainty about the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of determining who bears the tax burden lays fundamentally on whether a national or a subnational (that is, provincial or state) tax is being debated.
In assessing the economic effects of taxation, it is necessary to differentiate between various points of tax rates. The statutory rates will be dictated in the law; generally these are marginal rates, but for some cases they are median rates. Marginal income tax rates signify the fraction of incremental income that is taken by taxation when income grows by one dollar. Thus, if tax onus increases by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax legislature usually contain graduated marginal rates—i.e., rates that rise as income grows. Careful analysis of marginal tax rates need to regard provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) reduces by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points higher than nominated within 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 considering incentive effects of taxation. It is even more difficult to know the marginal effective tax rate applied to income from business and capital, because 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 grants that the marginal effective tax rate in income from capital is zero under a consumption-based tax.
Average income tax rates display the fraction of total income that is taken in taxation. The pattern of average rates is the one that is important for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates generally increase 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 side of things, preferential treatment of income received predominantly by high-income households might dampen these effects, allowing regressivity, as shown by average tax rates that decline as income grows.
For MYOB Brisbane expert advice, contact Stone Consulting today. Stone Consulting also runs MYOB training in Brisbane.
Sphere: Related Content