Aussie Web Directory

Taxes are differentiated by the effect they have on the allocation of income and wealth. A proportional tax is a tax that imposes the same relative requirement on all taxpayers—i.e., when tax liability and income increase in equal scale. A progressive tax is recognisable by a higher than proportional increase in the tax liability relative to the increase in income, and a regressive tax is recognised by a less than proportional rise in the comparable burden. Thus, progressive taxes are viewed as reducing a lack of equality in income distribution, while regressive taxes may have the effect of increasing these inequalities.

The taxes that are generally believed to be progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, may become less so within the upper-income class—in particular if a taxpayer is permitted to lower his tax base by claiming deductions or by leaving out some income elements from his taxable income. Proportional tax rates which are applied to lower-income demographics could also be more progressive if such personal exemptions are made.

Income measured over the course of a given year does not definitely provide the most appropriate measure of taxpaying requirement. For example, transitory growth in income might be saved, and in temporary declines in income a taxpayer might opt to finance consumption by reducing savings. Thus, if taxation is made comparable alongside “permanent income,” it should be less regressive (or more progressive) than when it is compared with annual income.

Sales taxes and excises (except luxuries) are mostly regressive, because the share of own income consumed or spent on specific goods decreases as the amount of personal income rises. Poll taxes (also known as head taxes), nominated as a fixed amount per capita, patently are regressive.

It is not simple to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of a lack of certainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of dictating who bears the tax burden is dependant fundamentally on whether a national or a subnational (that is, provincial or state) tax is being considered.

In regarding the economic effect of taxation, it is relevant to differentiate between varied ideas of tax rates. The statutory rates are specified in the law; usually these are marginal rates, but for some cases they are median rates. Marginal income tax rates denote 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 statutes generally contain graduated marginal rates—i.e., rates that rise as income rises. Structured analysis of marginal tax rates are required to regard provisions apart from the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lowers by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points greater than specified within the statutory rates. Since marginal rates display how after-tax income changes in response to changes in before-tax income, they are the important ones for regarding incentive effects of taxation. It is even more difficult to nominate the marginal effective tax rate to apply to income from business and capital, because it may be dependant on such considerations 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 nil under a consumption-based tax.

Average income tax rates display the percentage of total income that is taken in taxation. The pattern of average rates is the one that is important for considering the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates commonly rise with income, both because personal allowances are allowed for the taxpayer and dependents and because marginal tax rates are graduated; on the other hand, preferential treatment of income received fundamentally by high-income households could swamp these effects, allowing regressivity, as indicated by average tax rates that decline as income rises.

For MYOB Brisbane expert advice, contact Stone Consulting today. Stone Consulting also runs MYOB training in Brisbane.