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Taxes are categorized by the impact they have on the distribution of income and wealth. A proportional tax is a kind that impinges the same relative burden on each taxpayer—i.e., when tax liability and income increase in the same scale. A progressive tax is recognised by a more than proportional increase in the tax liability relative to the growth in income, and a regressive tax is characterized by a less than proportional rise in the comparative onus. Thus, progressive taxes are viewed as reducing the lack of equality in income distribution, but regressive taxes are seen to result in an increase these inequalities.

The taxes that are normally regarded as progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, may become less so within the upper-income categories—especially if a taxpayer is allowed to reduce his tax base by claiming deductions or by excluding some certain income elements from his taxable income. Proportional tax rates when applied to lower-income demographics will also be more progressive if such exemptions of a personal nature are declared.

Income measured over a given year might not definitely come up with the most suitable measure of taxpaying status. For example, transitory growth in income can be saved, and in temporary declines in income a taxpayer could decide to provide for consumption by taking from savings. Thus, if taxation is made comparable with “permanent income,” it should be less regressive (or more progressive) than if it is made comparable with annual income.

Sales taxes and excises (save on luxuries) are usually regressive, because the share of own income consumed or spent for a specific good lessens as the level of personal income increases. Poll taxes (also known as head taxes), calculated as a standard amount per capita, clearly are regressive.

It is not easy to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to uncertainty surrounding 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 fundamentally on whether a national or a subnational (that is, provincial or state) tax is being decided.

In regarding the economic effects of taxation, it is important to distinguish between differing points of tax rates. The statutory rates will include those specified in the legislation; often these are marginal rates, but in some cases they are median rates. Marginal income tax rates note the fraction of incremental income that is demanded by taxation when income rises by one dollar. Therefore, if tax onus increases by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax legislature often contain graduated marginal rates—i.e., rates that increase as income grows. Structured analysis of marginal tax rates should consider provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lowers by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points higher than specified by the statutory rates. Since marginal rates indicate how after-tax income is changed in response to changes in before-tax income, they are the relevant ones for appraising incentive effects of taxation. It is even more complicated to realise the marginal effective tax rate applied to income from business and capital, since it may depend on factors including the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem grants that the marginal effective tax rate in income from capital is nothing under a consumption-based tax.

Average income tax rates show the portion of total income that is taken in taxation. The pattern of average rates is the one that is necessary for considering the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates usually increase with income, both because personal allowances are provided for the taxpayer and dependents and also because marginal tax rates are graduated; conversely, preferential treatment of income received fundamentally by high-income households may dwarf these effects, producing regressivity, as indicated by average tax rates that lessen as income grows.

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