Mack and Mark

Taxes can be categorized by the impact they have on the distribution of income and wealth. A proportional tax is a kind that imposes the same relative liability on all the taxpayers—i.e., in the case where tax liability and income grow in the same scale. A progressive tax is recognised by a larger than proportional rise in the tax onus relative to the rise in income, and a regressive tax is recognised by a less than proportional increase in the related onus. Ergo, progressive taxes are seen as removing a lack of equality in income distribution, whereas regressive taxes can have the result of increasing these inequalities.

The taxes that are generally believed to be progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, might become less so within the upper-income demographic—especially if a taxpayer is allowed to lessen his tax base by declaring deductions or by excluding some particular income aspects from his taxable income. Proportional tax rates if applied to lower-income classes will also be more progressive if exemptions of a personal nature are claimed.

Income measured over the period of a given year might not definitely offer the most accurate measure of taxpaying requirements. For example, transitory growth in income might be saved, and during temporary declines in income a taxpayer might elect to pay for consumption by taking from savings. Therefore, if taxation is held in comparison along with “permanent income,” it can be less regressive (or more progressive) than if held in comparison with annual income.

Sales taxes and excises (excepting luxuries) are mostly regressive, because the dissemination of own income consumed or spent for specific goods lessens as the rate of personal income increases. Poll taxes (also called head taxes), levied as a standard amount per capita, patently are regressive.

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

In regarding the economic purposes of taxation, it is essential to differentiate between differing ideas of tax rates. The statutory rates include those 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 demanded by taxation when income increases by one dollar. Hence, if tax liability rises by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax statutes often contain graduated marginal rates—i.e., rates that increase as income rises. Structured analysis of marginal tax rates should regard provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) falls by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points greater than indicated within 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 assessing incentive effects of taxation. It is even more complicated to understand the marginal effective tax rate to apply to income from business and capital, as it may be reliant on considerations 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 nil under a consumption-based tax.

Average income tax rates determine the fraction of total income that is demanded 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 rises with income. Average income tax rates usually increase with income, both because personal allowances are granted for the taxpayer and dependents and because marginal tax rates are graduated; on the other side of things, preferential treatment of income received for the most part by high-income households might dampen these effects, producing regressivity, as indicated by average tax rates that lessen as income increases.

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