Mack and Mark

Taxes can be differentiated by the effect they have on the allocation of income and wealth. A proportional tax is a kind that impinges the same relative onus on all the taxpayers—i.e., when tax liability and income increase in relative scale. A progressive tax is recognised by a more than proportional increase in the tax burden in regard to the increase in income, and a regressive tax is recognisable by a less than proportional growth in the comparable onus. Thus, progressive taxes are regarded as fighting the lack of equality in income distribution, whereas regressive taxes are found to increase these inequalities.

The taxes that are normally thought to be progressive include individual income taxes and estate taxes. Income taxes that are declarably progressive, however, can become less so for the upper-income class—particularly if a taxpayer is able to lower his tax base by claiming deductions or by leaving out some income components from his taxable income. Proportional tax rates which are applied to lower-income categories could also be more progressive if personal exemptions are claimed.

Income measured over the period of a given year does not absolutely come up with the most accurate measure of taxpaying requirement. For example, transitory rises in income could be saved, and within temporary declines in income a taxpayer may opt to provide for consumption by reducing savings. Thus, if taxation is held in comparison along with “permanent income,” it would be less regressive (or more progressive) than when it is compared with annual income.

Sales taxes and excises (excepting luxuries) are mostly regressive, because the spread of personal income consumed or spent on a specific good decreases as the rate of personal income rises. Poll taxes (also known as head taxes), calculated as a set amount per capita, obviously are regressive.

It is not simple to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to the lack of certainty about the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of determining who bears the tax burden rests crucially on whether a national or a subnational (that is, provincial or state) tax is being decided.

In analysing the economic purposes of taxation, it is relevant to differentiate between varied concepts of tax rates. The statutory rates include those nominated in legislature; generally these are marginal rates, but for some cases they are median rates. Marginal income tax rates note the fraction of incremental income demanded by taxation when income increases by one dollar. Thus, if tax liability grows by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax legislation often contain graduated marginal rates—i.e., rates that grow as income increases. Careful analysis of marginal tax rates are required to regard provisions as well as 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 greater than indicated in the statutory rates. Since marginal rates display how after-tax income increases or decreases 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 know the marginal effective tax rate applicable to income from business and capital, as it may be reliant on factors such as the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem shows that the marginal effective tax rate in income from capital is zero under a consumption-based tax.

Average income tax rates determine the portion of total income that is paid in taxation. The pattern of average rates is the one that is necessary for judging the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates usually 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 could swamp these effects, producing regressivity, as displayed by average tax rates that lower as income grows.

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