Proportional tax

A proportional tax is a tax imposed so that the effective tax rate is fixed as the amount to which the rate is applied increases. The term "proportional tax" describes a distribution effect, which can be applied to any type of tax system (income or consumption) that meets the definition. The term proportional refers to the way the rate remains consistent and does not progress from "low to high" or "high to low" as income or consumption changes. A progressive tax is a tax imposed so that the tax rate increases as the amount to which the rate is applied increases.^[1]^[2]^[3] The opposite of a progressive tax is a regressive tax, where the tax rate decreases as the amount to which the rate is applied increases. Proportional taxes maintain equal tax incidence 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 rises as the income or profit of the taxed entity rises.^{[citation needed]} Flat taxes, implemented as well as proposed, usually exempt 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.

[edit] Proportional rates

Proportional taxes on consumption are considered by some to be regressive; 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 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 can often exclude items or provide rebates in an effort to create progressive 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.