Max Mox Mix

Taxes are differentiated by the effect they have on the allocation of income and wealth. A proportional tax is a kind that puts the same relative onus on all taxpayers—i.e., where tax liability and income move in equal proportion. A progressive tax is recognised by a more than proportional increase in the tax burden relative to the rise in income, and a regressive tax is recognised by a less than proportional rise in the relative burden. Ergo, progressive taxes are seen as taking away the lack of equality in income distribution, while regressive taxes can cause an increase in 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 within the upper-income demographic—in particular if a taxpayer is permitted to lower his tax base by declaring deductions or by removing some particular income aspects from his taxable income. Proportional tax rates if applied to lower-income groups could also be more progressive if personal exemptions are made.

Income measured over the course of a given period might not necessarily provide the best measure of taxpaying status. For example, transitory growth in income could be saved, and during temporary declines in income a taxpayer may decide to finance consumption by taking from savings. Thus, if taxation is regarded along with “permanent income,” it will be less regressive (or more progressive) than if it is held in comparison with annual income.

Sales taxes and excises (with the exception of luxuries) are mostly regressive, because the share of one’s income consumed or spent for specific goods lowers as the level of personal income is raised. Poll taxes (aka head taxes), calculated as a standard amount per capita, clearly are regressive.

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

In analysing the economic effect of taxation, it is essential to distinguish between several points of tax rates. The statutory rates are specified in the legislation; generally speaking these are marginal rates, but for some cases they are mean rates. Marginal income tax rates denote the fraction of incremental income taken by taxation when income grows by one dollar. So, if tax liability increases by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax laws commonly contain graduated marginal rates—i.e., rates that increase as income increases. Structured analysis of marginal tax rates should regard provisions as well as the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) falls by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points greater than specified in the statutory rates. Since marginal rates indicate how after-tax income increases or decreases in response to changes in before-tax income, they are the important 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, because it may be dependant on considerations such 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 indicate the percentage of total income that is required 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 increases with income. Average income tax rates commonly grow with income, both because personal allowances are allowed for the taxpayer and dependents and also due to that marginal tax rates are graduated; on the flip side, preferential treatment of income received fundamentally by high-income households may dampen these effects, producing regressivity, as signified by average tax rates that lower as income increases.

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