Types Of Tax Systems
Taxes can be categorized by the effect they have on the placement of income and wealth
. A proportional tax is a tax that places the same relative burden on each taxpayer - i.e., when tax liability and income increase in relative proportion. A progressive tax is recognisable by a more than proportional growth in the tax burden relative to the growth in income, and a regressive tax is recognised by a less than proportional rise in the related onus. So, progressive taxes are seen as fighting inequity in income distribution, while regressive taxes may result in increasing these inequalities.
The taxes that are normally thought to be progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, may become less so for the upper-income class - particularly if a taxpayer is able to reduce his tax base by nominating deductions or by leaving out certain income elements from his taxable income. Proportional tax rates which are applied to lower-income demographics could also be more progressive if personal exemptions are made.
Income measured over the course of a given year might not necessarily offer the most accurate measure of taxpaying ability. For example, transitory growth in income can be saved, and within temporary declines in income a taxpayer could choose to provide for consumption by taking from savings. Thus, if taxation is compared with "permanent income,"it can be less regressive (or more progressive) than if it is made comparable with annual income.
Sales taxes and excises (except those on luxuries) tend to be regressive, because the share of one's income consumed or spent on a specific good lessens as the amount of personal income increases. Poll taxes (also known as head taxes), calculated as a standard amount per capita, clearly are regressive.
It is complicated to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of the uncertainty surrounding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of deciding 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 debated.
In considering the economic purposes of taxation, it is essential to differentiate between various concepts of tax rates. The statutory rates include those dictated in law; generally speaking these are marginal rates, but for some cases they are median rates. Marginal income tax rates denote the fraction of incremental income that is demanded by taxation when income grows by one dollar. Hence, if tax liability rises by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax regulations commonly contain graduated marginal rates - i.e., rates that rise as income grows. Heavy analysis of marginal tax rates are required to take into account provisions other than the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) declines by 20 cents for each one-dollar increase in income, the marginal rate is 20 percentage points more than nominated by 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 appropriate ones for appraising incentive effects of taxation. It is even more difficult to know the marginal effective tax rate applicable to income from business and capital, as it may be reliant on factors including 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 zero under a consumption-based tax.
Average income tax rates display the percentage of total income that is paid in taxation. The pattern of average rates is the one that is relevant for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates generally grow with income, both because personal allowances are allowed for the taxpayer and dependents and also because marginal tax rates are graduated; on the other hand, preferential treatment of income received fundamentally by high-income households might swamp these effects, allowing regressivity, as signified by average tax rates that decline as income increases.
by: Madie Jones
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