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Taxes can be differentiated by the effect they have on the distribution of income and wealth. A proportional tax is one that places the same relative burden on each taxpayer—i.e., where tax liability and income move in relative levels. A progressive tax is characterizable by a higher than proportional growth in the tax burden in relation to the growth in income, and a regressive tax is recognisable by a less than proportional rise in the related burden. So, progressive taxes are thought of as reducing a lack of equality in income distribution, whereas regressive taxes might result in an increase these inequalities.

The taxes that are often believed to be progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, might become less so within the upper-income categories—in particular if a taxpayer is permitted to lower his tax base by claiming deductions or by leaving out some particular income elements from his taxable income. Proportional tax rates if applied to lower-income categories could also be more progressive if such personal exemptions are claimed.

Income measured over a given period does not necessarily come up with the most appropriate measure of taxpaying status. For example, transitory rises in income can be saved, and in temporary declines in income a taxpayer could decide to provide for consumption by decreasing savings. Therefore, if taxation is regarded with “permanent income,” it can be less regressive (or more progressive) than when it is made comparable with annual income.

Sales taxes and excises (except those on luxuries) tend to be regressive, because the dissemination of one’s income consumed or spent for a specific good declines as the amount of personal income grows. Poll taxes (also termed head taxes), nominated as a fixed amount per capita, clearly are regressive.

It is complicated to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to the uncertainty about the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating who bears the tax burden lays for the most part on whether a national or a subnational (that is, provincial or state) tax is being decided.

In regarding the economic purposes of taxation, it is important to distinguish between several points of tax rates. The statutory rates are those specified in legislature; usually these are marginal rates, but in some cases they are median rates. Marginal income tax rates indicate the fraction of incremental income demanded by taxation when income grows by one dollar. Thus, if tax burden increases by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax laws usually contain graduated marginal rates—i.e., rates that increase as income grows. Structured analysis of marginal tax rates should 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 growth in income, the marginal rate is 20 percentage points higher than indicated by the statutory rates. Since marginal rates signify how after-tax income moves 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 applicable to income from business and capital, since 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 holds that the marginal effective tax rate in income from capital is nothing under a consumption-based tax.

Average income tax rates determine the portion of total income that is required 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 commonly rise with income, both because personal allowances are granted for the taxpayer and dependents and also due to that marginal tax rates are graduated; on the other side of things, preferential treatment of income received mostly by high-income households can swamp these effects, allowing regressivity, as signified by average tax rates that fall as income increases.

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This entry was posted on Thursday, July 8th, 2010 at 5:56 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.