A proportional tax
is a tax
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
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
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. 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. A progressive tax 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, where the tax rate decreases as the amount subject to taxation increases.
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.