Mack and Mark

Taxes can be categorized by the effect they have on the allocation of income and wealth. A proportional tax is the kind of tax that applies the same relative liability on all taxpayers—i.e., in the case where tax liability and income move in relative scale. A progressive tax is recognised by a greater than proportional growth in the tax liability in relation to the rise in income, and a regressive tax is recognisable by a less than proportional increase in the comparative onus. Ergo, progressive taxes are thought of as taking away inequity in income distribution, but regressive taxes may increase these inequalities.

The taxes that are usually considered progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, can become less so in the upper-income class—particularly if a taxpayer is allowed to lower his tax base by nominating deductions or by removing some certain income parts from his taxable income. Proportional tax rates when applied to lower-income classes would also be more progressive if such personal exemptions are claimed.

Income measured over the period of a year might not definitely provide the most suitable measure of taxpaying requirements. For example, transitory growth in income could be saved, and within temporary declines in income a taxpayer might opt to pay for consumption by reducing savings. Ergo, if taxation is regarded along with “permanent income,” it should be less regressive (or more progressive) than if held in comparison with annual income.

Sales taxes and excises (save luxuries) tend to be regressive, because the portion of own income consumed or spent for specific goods declines as the rate of personal income increases. Poll taxes (also called head taxes), nominated as a set amount per capita, patently are regressive.

It is hard 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 determining 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 effects of taxation, it is relevant to distinguish between differing concepts of tax rates. The statutory rates are those dictated in legislation; usually these are marginal rates, but sometimes they are mean 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 liability increases by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax legislation generally contain graduated marginal rates—i.e., rates that grow as income grows. Heavy analysis of marginal tax rates are required to take into account provisions apart from the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lowers by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points more than indicated 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 appropriate ones for assessing incentive effects of taxation. It is even more difficult to know the marginal effective tax rate to apply to income from business and capital, because it may be reliant on such factors 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 signify the fraction of total income that is required in taxation. The pattern of average rates is the one that is relevant for appraising the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates usually grow with income, both because personal allowances are granted for the taxpayer and dependents and because marginal tax rates are graduated; on the other hand, preferential treatment of income received fundamentally by high-income households may dwarf these effects, allowing regressivity, as displayed by average tax rates that decline as income rises.

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