Mack and Mark

Taxes are distinguished by the effect they have on the distribution of income and wealth. A proportional tax is a tax that imposes the same relative liability on all taxpayers—i.e., where tax liability and income grow in relative proportion. A progressive tax is recognised by a larger than proportional rise in the tax onus in relation to the rise in income, and a regressive tax is characterizable by a less than proportional rise in the comparable onus. So, progressive taxes are regarded as taking away inequalities in income distribution, while regressive taxes might have the result of increasing these inequalities.

The taxes that are often thought to be progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, could become less so for the upper-income demographic—particularly if a taxpayer is allowed to lower his tax base by nominating deductions or by excluding some particular income elements from his taxable income. Proportional tax rates when applied to lower-income categories would also be more progressive if personal exemptions are claimed.

Income measured over the course of a given period might not absolutely offer the most appropriate measure of taxpaying requirements. For example, transitory increases in income can be saved, and within temporary declines in income a taxpayer might select to provide for consumption by reducing savings. Ergo, if taxation is held in comparison alongside “permanent income,” it can be less regressive (or more progressive) than when it is held in comparison with annual income.

Sales taxes and excises (save those on luxuries) are generally regressive, because the spread of individual income consumed or spent on a specific good lowers as the level of personal income rises. Poll taxes (also known as head taxes), calculated as a flat amount per capita, obviously are regressive.

It is complicated to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of the uncertainty about 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 determined.

In analysing the economic purposes of taxation, it is relevant to differentiate between several points of tax rates. The statutory rates will be nominated in legislature; generally these are marginal rates, but for some cases they are average rates. Marginal income tax rates indicate the fraction of incremental income demanded by taxation when income rises by one dollar. Ergo, if tax burden grows by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax legislature usually contain graduated marginal rates—i.e., rates that rise as income increases. Heavy analysis of marginal tax rates are required to consider 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 rise in income, the marginal rate is 20 percentage points more than indicated in the statutory rates. Since marginal rates signify how after-tax income is changed in response to changes in before-tax income, they are the appropriate ones for considering incentive effects of taxation. It is even more difficult to understand the marginal effective tax rate to apply to income from business and capital, as it may rely on such considerations 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 determine the portion of total income that is required in taxation. The pattern of average rates is the one that is relevant 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 increase with income, both because personal allowances are provided for the taxpayer and dependents and due to that marginal tax rates are graduated; on the other hand, preferential treatment of income received mostly by high-income households may dampen these effects, forcing regressivity, as signified by average tax rates that lessen as income increases.

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