Taxes can be categorized by the impact they have on the placement of income and wealth. A proportional tax is the kind that places the same relative liability on every taxpayer—i.e., in the case where tax liability and income increase in the same proportion. A progressive tax is recognisable by a more than proportional growth in the tax liability in relation to the increase in income, and a regressive tax is recognised by a less than proportional rise in the relative liability. Hence, progressive taxes are seen as removing inequity in income distribution, while regressive taxes may result in increasing these inequalities.

The taxes that are usually thought to be progressive include individual income taxes and estate taxes. Income taxes that are declarably progressive, however, might become less so for the upper-income class—particularly if a taxpayer is able to lower his tax base by claiming deductions or by taking some certain income aspects from his taxable income. Proportional tax rates which are applied to lower-income demographics could also be more progressive if personal exemptions are declared.

Income measured over the course of a given year may not necessarily offer the most appropriate measure of taxpaying status. For example, transitory growth in income could be saved, and during temporary declines in income a taxpayer could select to pay for consumption by reducing savings. Ergo, if taxation is made comparable along with “permanent income,” it should be less regressive (or more progressive) than when made comparable with annual income.

Sales taxes and excises (save luxuries) tend to be regressive, because the portion of personal income consumed or spent for specific goods declines as the amount of personal income is raised. Poll taxes (also called head taxes), calculated as a flat amount per capita, clearly are regressive.

It is difficult to classify corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to uncertainty surrounding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of determining who bears the tax burden is dependant crucially on whether a national or a subnational (that is, provincial or state) tax is being decided.

In considering the economic purposes of taxation, it is important to distinguish between several ideas of tax rates. The statutory rates are those nominated in legislation; generally speaking these are marginal rates, but for some cases they are mean rates. Marginal income tax rates note the fraction of incremental income taken by taxation when income rises by one dollar. So, if tax onus rises by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax regulations often contain graduated marginal rates—i.e., rates that grow as income rises. Careful analysis of marginal tax rates need to take into account provisions as well as the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lowers by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points higher than specified by the statutory rates. Since marginal rates specify how after-tax income increases or decreases in response to changes in before-tax income, they are the necessary ones for regarding incentive effects of taxation. It is even more difficult to realise the marginal effective tax rate applied to income from business and capital, as it may rely on factors including the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem shows that the marginal effective tax rate in income from capital is nil under a consumption-based tax.

Average income tax rates indicate the fraction of total income that is demanded in taxation. The pattern of average rates is the one that is in consideration for considering the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates usually increase with income, both because personal allowances are provided for the taxpayer and dependents and because marginal tax rates are graduated; conversely, preferential treatment of income received predominantly by high-income households can dampen these effects, allowing regressivity, as displayed by average tax rates that decline as income rises.

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