Max Mox Mix

Taxes are differentiated by the impact they have on the placement of income and wealth. A proportional tax is a kind that imposes the same relative onus on each taxpayer—i.e., in the case where tax liability and income grow in the same scale. A progressive tax is recognised by a more than proportional rise in the tax burden relative to the increase in income, and a regressive tax is recognised by a less than proportional growth in the comparable liability. Hence, progressive taxes are regarded as taking away inequalities in income distribution, but regressive taxes are seen to result in increasing 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 for the upper-income group—especially if a taxpayer is able to lower his tax base by nominating deductions or by taking certain income components from his taxable income. Proportional tax rates which are applied to lower-income classes will also be more progressive if exemptions of a personal nature are declared.

Income measured over the period of a year might not definitely come up with the best measure of taxpaying ability. For example, transitory growth in income might be saved, and in temporary declines in income a taxpayer may decide to finance consumption by decreasing savings. Ergo, if taxation is regarded alongside “permanent income,” it should be less regressive (or more progressive) than if it is made comparable with annual income.

Sales taxes and excises (with the exception of luxuries) tend to be regressive, because the portion of one’s income consumed or spent for a specific good decreases as the amount of personal income grows. Poll taxes (also known as head taxes), levied as a flat amount per capita, clearly are regressive.

It is hard to classify corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of the lack of certainty about the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of dictating who bears the tax burden rests essentially on whether a national or a subnational (that is, provincial or state) tax is being considered.

In analysing the economic purpose of taxation, it is important to distinguish between various points of tax rates. The statutory rates will include those specified in legislation; commonly these are marginal rates, but sometimes they are average rates. Marginal income tax rates denote the fraction of incremental income demanded by taxation when income increases by one dollar. Ergo, if tax liability increases by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax legislature usually contain graduated marginal rates—i.e., rates that increase as income rises. Structured analysis of marginal tax rates need to take into account provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lessens by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points greater than indicated by the statutory rates. Since marginal rates specify how after-tax income increases or decreases in response to changes in before-tax income, they are the appropriate ones for considering incentive effects of taxation. It is even more complicated to know the marginal effective tax rate to apply to income from business and capital, as it may depend on considerations such 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 signify the percentage of total income that is required in taxation. The pattern of average rates is the one that is important for appraising the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates generally rise with income, both because personal allowances are permitted for the taxpayer and dependents and also because marginal tax rates are graduated; on the other side of things, preferential treatment of income received predominantly by high-income households may dampen these effects, forcing regressivity, as displayed by average tax rates that lower as income grows.

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