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Proportional Taxation

Debatably, the most important element of tax systems is the overall percentage of tax burden as it relates to the type of system, be it consumption or income. It makes it therefore important to analyze and describe the distribution effects, in terms of either proportionally, low to high or high to low. Proportional taxation lies in between progressive and regressive taxation.

Basically, progressive taxation is a tax imposed to see to it that effective tax rate escalates as the rate amount to which it is applied escalates too. Regressive taxation on the other hand means the opposite, where the effective tax rate decreases as the amount subject to taxation escalates. Proportional taxation therefore means the effective tax rate remains constant even as the amount subject to taxation increases.

Relative to the resources, Proportional taxation imposes an equivalent tax burden on the rich and poor. Proportional taxation simply explains the distribution effects on either expenditure or income, in reference to the way the effective rate remains consistent even as the consumption or income changes, on condition the marginal tax rate equals the average tax rate.

Thus, Proportional taxation keeps an equal tax incidence in spite of the ability to pay and what it more, Proportional taxation doesn’t shift the tax incidence unreasonably to those with either higher or lower economic welfare.

It is very rare to find Proportional taxes on well established economies, because their national taxes include graduated tax on corporate profits and household incomes which as a result means that the marginal tax rate escalates as the corporate profits or household incomes of the taxed unit escalates.

Proportional taxation rates

Some individuals consider proportional taxes as regressive on consumption. This is to say that lowly paid citizens kind of spend a higher percentage of their earnings in taxable sales than their well paid counterparts. This calculation however is achieved when the payable tax is divided by income or earnings and not by the amount spent, (the tax base).

The tax rate is directly proportional, meaning that highly paid individuals pay more tax but at the equal exact rate they consume more. If for instance consumption tax is to be related to an individual’s earnings, then the unspent income will be treated as tax-deferred and will be taxed at a later time when the individual will spend it, which will then create a proportional rate using an earnings base.

In some instances however, when dealing with consumption taxes such as sales taxes, some items are exempted from tax, in order to alleviate the tax burden from the poor individuals in the society. This is with the aim of creating progressive effects in favor of the poor. Basic items such as clothing, drug prescriptions and non-prepared food among many others are exempted from sales tax.

Illustration of Proportional Taxation

Just recently, in New Zealand, there was a proposed proportional tax commonly known as the flatulence tax or the Agricultural Emissions Research Levy. The proposed tax’ main aim was to assist farmers comply with the Kyoto Protocol as it targeted the release of methane by farm animals. Methane is the number two most important greenhouse gas in the atmosphere today and in New Zealand, it accounts for over 50% of greenhouse gas emissions.

With the realization of the huge contribution by farm animals to global warming, the number of livestock in New Zealand has now doubled, thus increasing the emission rate of methane from the farm animals. It is approximated that 95% of methane is released by means of eructation while the remaining 5% is released by means of flatus, thus making it a very consequential issue.

Tags: Income, tax, Taxation

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