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Taxes can be categorized by the effect they have on the placement of income and wealth. A proportional tax is a tax that imposes the same relative liability on every taxpayer—i.e., where tax liability and income grow in the same levels. A progressive tax is characterizable by a greater than proportional increase in the tax onus in relation to the growth in income, and a regressive tax is characterized by a less than proportional growth in the related onus. So, progressive taxes are viewed as reducing a lack of equality in income distribution, but regressive taxes are found to have the result of an increase in these inequalities.

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

Income measured over the period of a given year may not absolutely give the most appropriate measure of taxpaying status. For example, transitory rises in income might be saved, and during temporary declines in income a taxpayer might decide to finance consumption by taking from savings. So, if taxation is held in comparison with “permanent income,” it will be less regressive (or more progressive) than when it is compared with annual income.

Sales taxes and excises (save on luxuries) are usually regressive, because the portion of personal income consumed or spent on specific goods lessens as the rate of personal income is raised. Poll taxes (aka head taxes), calculated as a fixed amount per capita, patently are regressive.

It is not easy to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to the lack of certainty surrounding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating who bears the tax burden is dependant for the most part on whether a national or a subnational (that is, provincial or state) tax is being decided.

In considering the economic purpose of taxation, it is essential to distinguish between differing ideas of tax rates. The statutory rates include those specified in legislature; generally speaking these are marginal rates, but for some cases they are average rates. Marginal income tax rates signify the fraction of incremental income taken by taxation when income is increased by one dollar. Ergo, if tax onus increases by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax laws generally contain graduated marginal rates—i.e., rates that increase as income grows. Heavy analysis of marginal tax rates should consider 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 growth in income, the marginal rate is 20 percentage points more than nominated by the statutory rates. Since marginal rates indicate how after-tax income increases or decreases in response to changes in before-tax income, they are the necessary ones for assessing incentive effects of taxation. It is even more complicated to nominate the marginal effective tax rate applicable to income from business and capital, since it may depend on considerations 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 nil under a consumption-based tax.

Average income tax rates signify the fraction of total income that is required in taxation. The pattern of average rates is the one that is in consideration for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates usually grow with income, both because personal allowances are allowed for the taxpayer and dependents and due to that marginal tax rates are graduated; conversely, preferential treatment of income received mostly by high-income households might dwarf these effects, forcing regressivity, as signified by average tax rates that decline as income increases.

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