Proportional rates are rates of interest that are based on the amounts of goods and services purchased. Typically the proportion is a fixed percentage that is applied to the purchase price of the items that are purchased by buyers. This approach is different from other forms of rating, such as the progressive and regressive approaches that may lead to a change in the actual rate based on relevant factors. With a proportional rate, the interest applied remains the same even when other factors change.
One of the more common examples of a proportional rate application is the assessment of sales taxes on goods and services sold within a certain jurisdiction. In this scenario, the rate is in the form of a fixed percentage of the cost of the product acquired. For example, if the sales tax applied to all retail purchases I the jurisdiction is six percent, the seller will collect that amount from all buyers, regardless of their individual economic statuses. Just as the sale price of the purchased item does not change in relation to other factors, the proportional rate of the sales tax due also does not change.
The idea behind an proportional rate is to set a standard that will apply in any situation. Doing so makes it possible to avoid the necessity of recognizing and analyzing a wide range of variables, a task that could be very time-consuming and also complicate the accounting process significantly. In addition, using a proportional rate approach to setting sales tax and other types of taxes assessed on a local level often help to generate funds for local municipalities and jurisdictions in a manner that does not place a huge tax burden on only a portion of residents. For example, everyone who buys $100 US dollars of groceries in a county or parish where there is a sales tax on food products will pay the same rate of interest, regardless of whether the buyer is a property owner or a blue collar worker living in an apartment, or is of a certain age.
While the use of a proportional rate is helpful in some situations, it is not considered a practical approach in others. For example, in situations that call for looking closely at personal income, this approach may or may not be the best way to go about setting a tax structure. When this is the case, a tax system that is considered regressive or progressive may be more in line. With a regressive system, the amount or proportion of taxes owed would be less even as income increases, while a progressive approach would call for the proportion of taxes applied to that same increase in income would rise. All these methods are in use in different countries around the world, both at local and national levels.
