Taxes are distinguished by the impact they have on the placement of income and wealth. A proportional tax is one that imposes the same relative burden on all taxpayers—i.e., where tax liability and income grow in the same proportion. A progressive tax is characterized by a more than proportional growth in the tax onus in regard to the growth in income, and a regressive tax is recognisable by a less than proportional rise in the comparable onus. Thus, progressive taxes are thought of as taking away inequity in income distribution, but regressive taxes are found to have the effect of increasing these inequalities.

The taxes that are normally thought to be progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, might become less so within the upper-income categories—in particular if a taxpayer is able to reduce his tax base by claiming deductions or by leaving out certain income elements from his taxable income. Proportional tax rates which are applied to lower-income categories would also be more progressive if personal exemptions are made.

Income measured over the period of a given year does not definitely offer the most accurate measure of taxpaying requirements. For example, transitory increases in income could be saved, and within temporary declines in income a taxpayer could elect to finance consumption by reducing savings. Thus, if taxation is held in comparison alongside “permanent income,” it should be less regressive (or more progressive) than when it is made comparable with annual income.

Sales taxes and excises (save those on luxuries) are usually regressive, because the spread of individual income consumed or spent for specific goods lowers as the rate of personal income rises. Poll taxes (also known as head taxes), levied as a fixed amount per capita, patently are regressive.

It is not simple to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of a lack of certainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of determining who bears the tax burden rests fundamentally on whether a national or a subnational (that is, provincial or state) tax is being debated.

In regarding the economic effect of taxation, it is important to distinguish between various concepts of tax rates. The statutory rates will be dictated in law; commonly these are marginal rates, but in some cases they are average rates. Marginal income tax rates note the fraction of incremental income that is demanded by taxation when income is increased by one dollar. Hence, if tax liability increases by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax legislature usually contain graduated marginal rates—i.e., rates that grow as income grows. Heavy analysis of marginal tax rates are required to regard provisions other than the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) reduces by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points greater than nominated within the statutory rates. Since marginal rates signify how after-tax income moves in response to changes in before-tax income, they are the important ones for regarding incentive effects of taxation. It is even more complicated to nominate the marginal effective tax rate to apply to income from business and capital, because it may be dependant on factors including the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem holds that the marginal effective tax rate in income from capital is zero under a consumption-based tax.

Average income tax rates display the portion of total income that is demanded in taxation. The pattern of average rates is the one that is in consideration for appraising the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates commonly increase with income, both because personal allowances are provided for the taxpayer and dependents and also because marginal tax rates are graduated; on the other hand, preferential treatment of income received for the most part by high-income households might swamp these effects, allowing regressivity, as displayed by average tax rates that decrease as income rises.

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