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Proportional tax
 
 
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A proportional tax is a tax
Tax

To tax is to impose a financial charge or other levy upon an individual or Legal person by a state or the functional equivalent of a state.Taxes are also imposed by many subnational entity....
 imposed so that the tax rate is fixed as the amount subject to taxation increases. In simple terms, it imposes an equal burden (relative to resources) on the rich and poor. "Proportional" describes a distribution effect on income or expenditure, referring to the way the rate remains consistent (does not progress from "low to high" or "high to low" as income
Income

Income, refers to consumption opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received......
 or consumption
Consumption

Consumption may refer to:*Using Final goods by a Consumer until disposal*Consumption *Consumption function, an economic formula*Power consumption, in electrical engineering...
 changes), where the marginal tax rate is equal to the average tax rate.






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A proportional tax is a tax
Tax

To tax is to impose a financial charge or other levy upon an individual or Legal person by a state or the functional equivalent of a state.Taxes are also imposed by many subnational entity....
 imposed so that the tax rate is fixed as the amount subject to taxation increases. In simple terms, it imposes an equal burden (relative to resources) on the rich and poor. "Proportional" describes a distribution effect on income or expenditure, referring to the way the rate remains consistent (does not progress from "low to high" or "high to low" as income
Income

Income, refers to consumption opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received......
 or consumption
Consumption

Consumption may refer to:*Using Final goods by a Consumer until disposal*Consumption *Consumption function, an economic formula*Power consumption, in electrical engineering...
 changes), where the marginal tax rate is equal to the average tax rate. It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Proportional taxes maintain equal tax incidence
Tax incidence

In economics, tax incidence is the analysis of the effect of a particular tax on the distribution of Welfare economics. Tax incidence is said to "fall" upon the group that, at the end of the day, bears the burden of the tax....
 regardless of the ability-to-pay and do not shift the incidence disproportionately to those with a higher or lower economic well-being.

Proportional taxes are uncommon in advanced economies, whose nationwide taxes typically include a graduated tax on household incomes and corporate profits, such that the marginal tax rate
Marginal tax rate

In a tax system and in economics, the tax rate describes the burden ratio at which a business or person is taxed. There are several methods used to present a tax rate: statutory, average, marginal, effective, effective average, and effective marginal....
 rises as the income or profit of the taxed entity rises. Flat taxes, implemented as well as proposed, usually exempt
Tax exemption

A tax exemption is an exemption from all or certain taxes of a state or nation in which part of the taxes that would normally be collected from an individual or an organization are instead foregone....
 from taxation household income below a statutorily determined level that is a function of the type and size of the household. As a result, such a flat marginal rate is consistent with a progressive average tax rate. A progressive tax
Progressive tax

A progressive tax is a tax by which the tax rate increases as the taxable amount increases. "Progressive" describes a distribution effect on income or Consumption , referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate....
 is a tax imposed so that the tax rate increases as the amount subject to taxation increases. The opposite of a progressive tax is a regressive tax
Regressive tax

A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. In simple terms, a regressive tax imposes a greater burden on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer's ability to pay as measured by assets, consumption,...
, where the tax rate decreases as the amount subject to taxation increases.

Proportional rates

Proportional taxes on consumption are considered by some to be regressive
Regressive tax

A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. In simple terms, a regressive tax imposes a greater burden on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer's ability to pay as measured by assets, consumption,...
; that is, low income people tend to spend a greater percentage of their income in taxable sales (using a cross section time-frame) than higher income people. However, this calculation is derived when the tax paid is divided not by the tax base (the amount spent) but by income, which is argued to create an arbitrary relationship. The tax rate itself is proportional with higher income people paying more tax but at the same rate as they consume more. If a consumption tax
Consumption tax

A consumption tax is a tax on spending on goods and services. The term refers to a system with a tax base of consumption. It usually takes the form of an indirect tax, such as a sales tax or value added tax....
 is to be related to income, then the unspent income can be treated as tax-deferred (spending savings at a later point in time), at which time it is taxed creating a proportional rate using an income base. However, consumption taxes like a sales tax
Sales tax

A sales tax is a consumption tax charged at the point of purchase for certain goods and services. The tax is usually set as a percentage by the government charging the tax....
 can often exclude items or provide rebates in an effort to create progressive
Progressive tax

A progressive tax is a tax by which the tax rate increases as the taxable amount increases. "Progressive" describes a distribution effect on income or Consumption , referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate....
 effects. In many locations, "necessary" items such as non-prepared food, clothing, or prescription drugs are exempt from sales tax to alleviate the burden on the poor.

See also

  • Tax incidence
    Tax incidence

    In economics, tax incidence is the analysis of the effect of a particular tax on the distribution of Welfare economics. Tax incidence is said to "fall" upon the group that, at the end of the day, bears the burden of the tax....
  • Laffer curve
    Laffer curve

    In economics, the Laffer curve is used to illustrate the idea that increases in the rate of taxation do not necessarily increase tax revenue. ....
  • Progressive tax
    Progressive tax

    A progressive tax is a tax by which the tax rate increases as the taxable amount increases. "Progressive" describes a distribution effect on income or Consumption , referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate....
  • Regressive tax
    Regressive tax

    A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. In simple terms, a regressive tax imposes a greater burden on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer's ability to pay as measured by assets, consumption,...
  • Robin Hood effect
    Robin Hood effect

    A Robin Hood effect is an economic occurrence where income is income redistribution so that economic inequality is reduced. The effect is named after Robin Hood, who is said to have stolen from the rich to give to the poor....
  • Suits index
    Suits index

    The Suits index of a public policy is a measure of collective progressivity, named for economist Daniel B. Suits. Similar to the Gini Coefficient, the Suits index is calculated by comparing the area under the Lorenz curve to the area under a proportional line....