Proportional, Progressive, and Regressive taxes
Taxes can be differentiated by the impact they have on the placement of income and wealth. A proportional tax is a tax that puts the same relative burden on all taxpayers—i.e., in the case where tax liability and income grow in equal levels. A progressive tax is recognised by a larger than proportional growth in the tax burden in relation to the rise in income, and a regressive tax is recognisable by a less than proportional growth in the relative liability. Thus, progressive taxes are thought of as fighting inequalities in income distribution, while regressive taxes might have the effect of increasing these inequalities.
The taxes that are generally considered progressive include individual income taxes and estate taxes. Income taxes that are declarably progressive, however, might become less so for the upper-income demographic—especially if a taxpayer is permitted to lessen his tax base by nominating deductions or by taking particular income aspects from his taxable income. Proportional tax rates which are applied to lower-income categories would also be more progressive if personal exemptions are made.
Income measured over a given period may not necessarily come up with the best measure of taxpaying requirements. For example, transitory rises in income could be saved, and within temporary declines in income a taxpayer could elect to provide for consumption by taking from savings. So, if taxation is held in comparison alongside “permanent income,” it should be less regressive (or more progressive) than when it is held in comparison with annual income.
Sales taxes and excises (except luxuries) tend to be regressive, because the dissemination of personal income consumed or spent for specific goods lessens as the amount of personal income grows. Poll taxes (also termed head taxes), levied as a flat amount per capita, patently are regressive.
It is hard to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally due to a lack of certainty regarding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of determining who bears the tax burden is dependant fundamentally on whether a national or a subnational (that is, provincial or state) tax is being determined.
In regarding the economic effect of taxation, it is important to distinguish between varied points of tax rates. The statutory rates will be specified in law; generally these are marginal rates, but sometimes they are average rates. Marginal income tax rates indicate the fraction of incremental income that is taken by taxation when income is increased by one dollar. Hence, if tax onus grows by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax regulations generally contain graduated marginal rates—i.e., rates that rise as income rises. Careful analysis of marginal tax rates must consider 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 rise in income, the marginal rate is 20 percentage points more than nominated in 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 considering incentive effects of taxation. It is even more complicated to realise the marginal effective tax rate applied to income from business and capital, since it may be dependant on considerations including 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 zero under a consumption-based tax.
Average income tax rates signify the percentage of total income that is demanded 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 grows with income. Average income tax rates generally rise with income, both because personal allowances are provided for the taxpayer and dependents and also because marginal tax rates are graduated; on the flip side, preferential treatment of income received mostly by high-income households might dampen these effects, forcing regressivity, as indicated by average tax rates that lower as income rises.
For MYOB Brisbane expert advice, contact Stone Consulting today. Stone Consulting also runs MYOB training in Brisbane.
