Progressive taxation refers to the increase in the average tax rate as a function of taxable income or wealth. This leads to a disproportionate appreciation of the tax burden in tandem with the rise in income/assets. Political and socio-tax progression is often justified by the declining marginal utility of increasing income and wealth.
The term progressive rate is often used in connection with personal income taxes, where individuals earning higher income remit more tax than those with lower income.
It can also be relevant to alteration of the tax base via tax exemptions, tax credits, or selective taxation which produces progressive distributional outcomes.
The linear progression of the marginal tax rate increases in one or more areas between the input tax rate and top rate. The higher effective tax rate (average tax rate) is carried out continuously (smooth).
With strictly proportional income tax, everyone pays a fixed proportion of his income to the state. The effect of this progression can also be distinguished using mathematical progression models. As regards cold progression, real increase in tax burden is only evident over a number of years designated by the tax inflation in conjunction with the progression induced.
A progressive tax maximizes the amount of tax funds that can be realized, with limited resistance, thus presenting the authorities an effective solution for their budgeting difficulties.
In a market economy, the bigger the investment, the greater the rate of return as a result of economies of scale and the expanded scope of investment opportunities.
Level tariffs are made up of one or more constant marginal tax rates. A higher effective income tax rate (average rate), has but one of the steps ripple dependent. This follows from the nature of the calculation of the average tax rate as the ratio of tax to the taxable income.
Even a one-step rate (flat tax, with only one tax rate) leads the combined effect of marginal tax rate and tax allowance (also called limit load) as a rise in the average income tax rate. As the rising taxable income approaches the tax burden, the marginal tax rate flattens. An indirect progression is highlighted since the marginal tax rate itself is not progressive, but only the average tax rate.
With the progressive income taxation, the unequal distribution of income is more or less reduced. The effective progression can be calculated from the income before and after taxes. Mathematically, in this case, the Gini coefficient effective progression rGini is based on a relative ratio.