Taxes can be distinguished by the effect they have on the distribution of income and wealth. A proportional tax is the kind of tax that puts the same relative onus on all the taxpayers—i.e., when tax liability and income move in the same scale. A progressive tax is characterizable by a greater than proportional growth in the tax onus in regard to the growth in income, and a regressive tax is recognisable by a less than proportional increase in the comparable burden. Thus, progressive taxes are seen as fighting a lack of equality in income distribution, while regressive taxes can result in increasing these inequalities.
The taxes that are usually considered progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, may become less so for the upper-income demographic—especially if a taxpayer is able to lower his tax base by declaring deductions or by removing particular income components from his taxable income. Proportional tax rates that are applied to lower-income groups could also be more progressive if exemptions of a personal nature are declared.
Income measured over a given period does not definitely give the best measure of taxpaying status. For example, transitory rises in income might be saved, and within temporary declines in income a taxpayer may elect to provide for consumption by decreasing savings. So, if taxation is regarded with “permanent income,” it would be less regressive (or more progressive) than if it is made comparable with annual income.
Sales taxes and excises (with the exception of those on luxuries) are generally regressive, because the portion of individual income consumed or spent on specific goods declines as the level of personal income is raised. Poll taxes (also known as head taxes), calculated as a set amount per capita, clearly are regressive.
It is hard to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of the 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 is dependant fundamentally on whether a national or a subnational (that is, provincial or state) tax is being determined.
In assessing the economic effect of taxation, it is necessary to differentiate between differing concepts of tax rates. The statutory rates include those nominated in law; generally these are marginal rates, but in some cases they are average rates. Marginal income tax rates note the fraction of incremental income demanded by taxation when income grows by one dollar. Hence, if tax onus grows by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax regulations generally contain graduated marginal rates—i.e., rates that grow as income rises. Heavy analysis of marginal tax rates are required to consider provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) reduces 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 specify 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 complicated to realise the marginal effective tax rate applied to income from business and capital, as it may rely on considerations such as the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem grants 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 in consideration for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates usually rise with income, both because personal allowances are permitted for the taxpayer and dependents and also due to that marginal tax rates are graduated; on the other side of things, preferential treatment of income received mostly by high-income households can dwarf these effects, producing regressivity, as displayed by average tax rates that lower as income increases.
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