Taxes which are proportional, progressive and regressive

The impact taxes have on how income and wealth are distributed allows us to differentiate between them. A proportionate tax is one in which the relative burden placed on each taxpayer is the same, i.e., one in which the ratio of income to tax due is constant.

A regressive tax is one in which the relative burden increases less than proportionately to the increase in income, whereas a progressive tax increases more than proportionally to the growth in income. Since regressive taxes have the potential to widen income distribution discrepancies, progressive taxes are thought to reduce income inequality.

Individual income taxes and inheritance taxes are two types of taxes that are typically seen as progressive. However, income taxes that are ostensibly progressive may become less progressive in the higher income brackets, particularly if a taxpayer is permitted to lower his tax base by filing deductions or by removing certain revenue components from his taxable income. If personal exemptions are announced, proportional tax rates imposed on income groups with lower incomes will likewise be more progressive.

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The greatest way to assess one's capacity to pay taxes is not always to look at income over the course of a year. For instance, a taxpayer may decide to save more during brief increases in income or spend less during temporary decreases in income. In light of this, taxation will be less regressive (or more progressive) when measured in terms of "permanent income" than when measured in terms of yearly income.

Sales taxes and excises (apart from those on luxuries) often have a regressive effect because as personal income levels grow, the proportion of money spent on a given product falls. It is evident that poll taxes, commonly referred to as head taxes, are regressive when assessed as a fixed sum per population.

Because it is unclear if corporations would be able to move their tax expenditures, it is challenging to categorise corporate income taxes and other taxes on business as progressive, regressive, or proportional (see below Shifting and incidence). Whether a national or subnational (that is, provincial or state) tax is being discussed makes a significant difference in the difficulty of defining who pays the tax burden.

It's crucial to make a distinction between various tax rate concepts when thinking about how taxes affect the economy. The rates that are considered to be "statutory" are those that are set down in the law; often, they are marginal rates, but they can also be average rates. As a result, the marginal tax rate is 45 percent if tax obligations increase by 45 percent of the money of income. Graduated marginal rates, or rates that increase as income increases, are frequently seen in income tax legislation.

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