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Taxes are differentiated by the impact they have on the placement of income and wealth. A proportional tax is the kind that puts the same relative liability on all taxpayers—i.e., when tax liability and income move in the same scale. A progressive tax is recognisable by a larger than proportional rise in the tax onus in regard to the growth in income, and a regressive tax is characterized by a less than proportional rise in the comparative onus. Hence, progressive taxes are seen as removing inequalities in income distribution, whereas regressive taxes are believed to have the result of increasing these inequalities.

The taxes that are usually considered progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, may become less so for the upper-income group—particularly if a taxpayer is permitted to lessen his tax base by nominating deductions or by taking particular income components from his taxable income. Proportional tax rates that are applied to lower-income groups would also be more progressive if personal exemptions are made.

Income measured over the course of a given period may not absolutely offer the most accurate measure of taxpaying requirement. For example, transitory increases in income could be saved, and in temporary declines in income a taxpayer could decide to finance consumption by decreasing savings. Ergo, if taxation is held in comparison alongside “permanent income,” it can be less regressive (or more progressive) than when it is held in comparison with annual income.

Sales taxes and excises (save on luxuries) are generally regressive, because the dissemination of personal income consumed or spent on a specific good lessens as the amount of personal income grows. Poll taxes (also called head taxes), levied as a flat amount per capita, obviously are regressive.

It is not easy to term 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 depends fundamentally on whether a national or a subnational (that is, provincial or state) tax is being decided.

In considering the economic purposes of taxation, it is necessary to differentiate between varied concepts of tax rates. The statutory rates will be specified in legislation; generally speaking these are marginal rates, but for some cases they are average rates. Marginal income tax rates indicate the fraction of incremental income that is taken by taxation when income is increased by one dollar. Thus, if tax burden rises by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax legislation generally contain graduated marginal rates—i.e., rates that grow as income increases. Heavy analysis of marginal tax rates must consider provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) falls by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points greater than nominated by the statutory rates. Since marginal rates signify how after-tax income changes 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 know the marginal effective tax rate applied to income from business and capital, because it may rely on factors such as the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem determines that the marginal effective tax rate in income from capital is nothing 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 relevant for judging 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 allowed for the taxpayer and dependents and because marginal tax rates are graduated; conversely, preferential treatment of income received for the most part by high-income households could dwarf these effects, forcing regressivity, as shown by average tax rates that decline as income increases.

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