Proportional, Progressive, and Regressive taxes
Taxes can be categorized by the impact they have on the allocation of income and wealth. A proportional tax is a tax that impinges the same relative requirement on each taxpayer—i.e., when tax liability and income grow in relative scale. A progressive tax is recognisable 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 increase in the related liability. So, progressive taxes are viewed as removing inequity in income distribution, but regressive taxes might have the effect of increasing these inequalities.
The taxes that are usually considered progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, might become less so within the upper-income demographic—especially if a taxpayer is permitted to lower his tax base by nominating deductions or by removing some certain income aspects from his taxable income. Proportional tax rates if applied to lower-income demographics would also be more progressive if such personal exemptions are claimed.
Income measured over the period of a year may not definitely come up with the most suitable measure of taxpaying ability. For example, transitory rises in income may be saved, and during temporary declines in income a taxpayer might elect to pay for consumption by reducing savings. So, if taxation is made comparable alongside “permanent income,” it can be less regressive (or more progressive) than when it is compared with annual income.
Sales taxes and excises (save luxuries) are usually regressive, because the spread of one’s income consumed or spent on a specific good decreases as the rate of personal income is raised. Poll taxes (also termed head taxes), nominated as a set amount per capita, patently are regressive.
It is not easy to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of uncertainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating who bears the tax burden lays crucially on whether a national or a subnational (that is, provincial or state) tax is being considered.
In regarding the economic purposes of taxation, it is relevant to differentiate between several ideas of tax rates. The statutory rates are nominated in legislature; commonly these are marginal rates, but sometimes they are average rates. Marginal income tax rates signify the fraction of incremental income that is taken by taxation when income rises by one dollar. Therefore, if tax liability rises by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax legislation often contain graduated marginal rates—i.e., rates that rise as income increases. Structured analysis of marginal tax rates need to consider 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 growth in income, the marginal rate is 20 percentage points higher than specified in the statutory rates. Since marginal rates indicate how after-tax income changes in response to changes in before-tax income, they are the relevant ones for regarding incentive effects of taxation. It is even more difficult to realise the marginal effective tax rate applicable to income from business and capital, as it may rely on factors such as the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem determines that the marginal effective tax rate in income from capital is nothing 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 assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates usually grow with income, both because personal allowances are permitted for the taxpayer and dependents and also due to that marginal tax rates are graduated; conversely, preferential treatment of income received for the most part by high-income households can dwarf these effects, producing regressivity, as shown by average tax rates that lower as income grows.
For MYOB Brisbane expert advice, contact Stone Consulting today. Stone Consulting also runs MYOB training in Brisbane.
Sphere: Related ContentComments
Tell me what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!