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Taxes are categorized by the impact they have on the distribution of income and wealth. A proportional tax is the kind that imposes the same relative requirement on all the taxpayers—i.e., where tax liability and income increase in the same levels. A progressive tax is characterized by a greater than proportional increase in the tax liability relative to the growth in income, and a regressive tax is recognisable by a less than proportional increase in the comparable onus. So, progressive taxes are seen as taking away inequalities in income distribution, but regressive taxes are seen to have the effect of increasing these inequalities.

The taxes that are normally considered progressive include individual income taxes and estate taxes. Income taxes that are declarably progressive, however, might become less so for the upper-income class—in particular if a taxpayer is permitted to lower his tax base by nominating deductions or by leaving out certain income aspects from his taxable income. Proportional tax rates if applied to lower-income categories can also be more progressive if such exemptions of a personal nature are declared.

Income measured over a given period might not definitely come up with the best measure of taxpaying status. For example, transitory increases in income might be saved, and within temporary declines in income a taxpayer might opt to pay for consumption by reducing savings. Thus, if taxation is made comparable with “permanent income,” it will be less regressive (or more progressive) than if compared with annual income.

Sales taxes and excises (except luxuries) tend to be regressive, because the portion of personal income consumed or spent on specific goods decreases as the amount of personal income increases. Poll taxes (also termed head taxes), nominated as a flat amount per capita, clearly are regressive.

It is hard to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of the uncertainty regarding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of determining who bears the tax burden is dependant crucially on whether a national or a subnational (that is, provincial or state) tax is being debated.

In assessing the economic effects of taxation, it is necessary to distinguish between differing points of tax rates. The statutory rates include those specified in the legislation; often these are marginal rates, but sometimes they are median rates. Marginal income tax rates note the fraction of incremental income demanded by taxation when income is increased by one dollar. Hence, if tax burden increases by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax statutes often contain graduated marginal rates—i.e., rates that increase as income grows. Careful analysis of marginal tax rates need to take into account provisions apart from the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) decreases by 20 cents for each one-dollar increase in income, the marginal rate is 20 percentage points higher than specified in the statutory rates. Since marginal rates indicate 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 difficult to understand the marginal effective tax rate to apply to income from business and capital, since it may be dependant on considerations such as the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem shows that the marginal effective tax rate in income from capital is zero under a consumption-based tax.

Average income tax rates display the part of total income that is demanded in taxation. The pattern of average rates is the one that is important for appraising the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates usually grow with income, both because personal allowances are permitted for the taxpayer and dependents and because marginal tax rates are graduated; on the other side of things, preferential treatment of income received fundamentally by high-income households could swamp these effects, producing regressivity, as displayed by average tax rates that fall as income increases.

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