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TAX PROPORTIONALITY:

The proportion of income paid in taxes at different levels of income. In some cases the proportion of income paid in taxes increases with income in other cases it decreases. And in still other cases, it remains the same. Tax proportionality comes in three alternatives -- proportional tax (different incomes pay the same proportion in tax), progressive tax (higher incomes pay a higher proportion in tax), and regressive (lower incomes pay a higher proportion in tax).
Governments are proficient at placing taxes on a wide assortment of goods, services, assets, and activities. Common tax bases include income, property, retail sales, motel accommodations, gasoline, telephone service, and many more. However, whatever, the "official" tax base, taxes ultimately come from income. In fact, taxes are essentially a means of transferring the purchasing power of income to governments.

Tax proportionality is the identification of the proportion of income paid in taxes at different income levels, regardless of the officially designated tax base. In some taxes the proportion of income paid in taxes increases with income (progressive) and in other cases it decreases (regressive). And in still other cases, it remains the same (proportional).

Politics are tightly intertwined with tax proportionality. To the degree that political views are affected by income, differences also arise in tax proportionality preferences. In particular, the poor would rather that the rich pay more and the rich would rather that the poor pay more.

Base and Rate

An understanding of tax proportionality is helped with an overview of two tax terms -- tax base and tax rate. A tax base is an item or activity that is subject to taxation. A tax rate is the percent of the tax base that is collected as tax.

A common tax base is income. An income tax rate is then the percentage of income paid in tax. Suppose, for example, that Jonathan McJohnson, a junior executive at OmniConglomerate, Inc., earns $50,000. If the income tax rate is 10 percent, then he pays 10 percent of his income, $5,000, in income taxes. The tax paid is the tax base times the tax rate.

tax=tax basextax rate
The need to collect taxes combined with the reluctance to pay taxes has prompted governments to identify a number of different tax bases. Tax bases are invariably some sort of asset or activity. A few of the more important tax bases are:
  • Income: At the top of the list of tax bases is income generated from productive activity. Taxes levied on income includes the ever-popular personal income tax that people are required to pay every April 15th, the corporate income tax on the profit earned by corporations, and the Social Security tax (the FICA payroll deduction) on wage earnings.

  • Wealth: Physical and financial assets are another favorite tax base of governments. The two most noted wealth taxes are property taxes paid by homeowners and estate or inheritance taxes paid on wealth passed down from one generation to the next.

  • Consumption: A third common tax base is consumption. Sales taxes are unquestionable the most common tax on consumption. However, a number specific consumption activities are also subject to taxation, taking the form of fuel taxes, liquor taxes, cigarette taxes, college tuition, public park entrance fees, drivers license fees, telephone usage taxes, and... well... the list goes on and on.

More or Less

While a wide range and extensive number of different tax bases have been used by governments, taxes are ultimately paid with income. As such, it's useful to document the proportion of income used to pay the tax. The resulting tax proportionality comes in three basic varieties
  • Proportional: A proportional tax is one in which the proportion of income paid in taxes is the same for all income levels. A proportional income tax exists, for example, if ever taxpayer pays exactly the same proportion of their income in taxes, that is, the same tax rate. Suppose that Winston Smythe Kennsington III earns $10 million of income and pays $1 million in income taxes (10 percent) and that Pollyanna Pumpernickel earns $10,000 in taxes and pays $1,000 in income taxes (also 10 percent). Because Winston and Pollyanna both pay 10 percent of their incomes in taxes, the income tax is proportional.

  • Progressive: A progressive tax is one in which the proportion of income paid in taxes is greater for higher income levels. A progressive income tax exists, for example, if taxpayers with more income pay a larger proportion in taxes, that is, a higher tax rate. Suppose that Winston Smythe Kennsington III earns $10 million of income and pays $2 million in income taxes (20 percent) and that Pollyanna Pumpernickel earns $10,000 in taxes and pays $1,000 in income taxes (10 percent). Because Winston pays a greater proportion of income in taxes than Pollyanna, the income tax is progressive.

  • Regressive: A regressive tax is one in which the proportion of income paid in taxes is smaller for higher income levels. A regressive income tax exists, for example, if taxpayers with more income pay a smaller proportion in taxes, that is, a lower tax rate. Suppose that Winston Smythe Kennsington III earns $10 million of income and pays $1 million in income taxes (10 percent) and that Pollyanna Pumpernickel earns $10,000 in taxes and pays $2,000 in income taxes (20 percent). Because Winston pays a smaller proportion of income in taxes than Pollyanna, the income tax is regressive.

Some Common Taxes

Different taxes have different degrees of tax proportionality. Some are progressive. Some are regressive. Very few actually end up exactly proportional. Consider the proportionality of some common taxes.
  • Personal Income Taxes: In theory, personal income taxes (the ones due on April 15th) are progressive. The "official" tax rate is greater at higher income levels. In practice, assorted deductions make income taxes more of a mixed bag. At the lower end of the income spectrum, taxes tend to be progressive. More income means a higher tax rate. However, as income continues to increase, taxes are often more regressive. That is, the highest tax rates are paid by those in the middle.

  • Sales Taxes: Sales taxes used by state and local governments are generally regressive. Because people tend to spend a smaller portion of income on consumption as income increases they also pay a smaller portion of income in sales taxes.

  • Payroll Taxes: Social Security taxes (the FICA paycheck deduction) are another regressive tax. While the rate is constant, Social Security taxes are collected only on wages and only up to maximum amount. Someone earning $1 million in wages pays the same dollar amount in taxes as someone earning $100,000 in wages. The result is a smaller portion of income paid in taxes, a regressive tax.

  • Estate Taxes: Estate, or inheritance, taxes on the transfer of wealth come in on the progressive side. Again, like Social Security taxes, the estate tax rate is constant, but the first $600,000 of wealth is exempt from taxes, which tends to make the effective tax rate increase with wealth. And because wealth is usually connected directly with income, people with higher incomes also tend to pay a greater proportion in estate taxes, a progressive tax.

A Bit of Politics

As an integral part of government, taxes are never far removed from politics. And because political inclination is closely connected to income level, so too is the preference for progressive or regressive taxes. That is, richer people prefer regressive taxes and poorer people prefer progressive taxes. No one likes taxes, but taxes are inevitable, most prefer that others pay.

To the extent that people with conservative political leanings also occupy the upper end of the income spectrum, they also tend to favor more regressive taxes, such as sales and payroll, while opposing more progressive taxes, including income and estate. To the extent that people with liberal political leanings also occupy the lower end of the income spectrum, they also tend to favor more progressive taxes, such as income and estate, while opposing more regressive taxes, including sales and payroll.

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Recommended Citation:

TAX PROPORTIONALITY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 23, 2018].


Check Out These Related Terms...

     | proportional tax | progressive tax | regressive tax | taxation principles | taxation basics | tax effects | revenue effect | allocation effect | tax equity | ability-to-pay principle | benefit principle | horizontal equity | vertical equity | tax efficiency | tax incidence | tax wedge | deadweight loss |


Or For A Little Background...

     | taxes | government functions | equity | distribution standards | public finance |


And For Further Study...

     | political views | public choice | good types | market failures | public goods: demand | public goods: efficiency | tax multiplier | personal tax and nontax payments | transfer payments |


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