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Taxes can be categorized by the impact they have on the placement of income and wealth. A proportional tax is a kind that imposes the same relative burden on each taxpayer—i.e., when tax liability and income increase in equal proportion. A progressive tax is recognisable by a greater than proportional rise in the tax burden in relation to the increase in income, and a regressive tax is recognised by a less than proportional growth in the comparative burden. So, progressive taxes are thought of as removing inequity in income distribution, but regressive taxes are believed 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 declarably progressive, however, may become less so within the upper-income demographic—particularly if a taxpayer is allowed to lower his tax base by claiming deductions or by taking some certain income parts from his taxable income. Proportional tax rates if applied to lower-income categories would also be more progressive if such exemptions of a personal nature are claimed.

Income measured over a given year may not definitely come up with the most accurate measure of taxpaying requirement. For example, transitory increases in income might be saved, and in temporary declines in income a taxpayer may decide to finance consumption by taking from savings. Ergo, if taxation is made comparable alongside “permanent income,” it can be less regressive (or more progressive) than if it is made comparable with annual income.

Sales taxes and excises (with the exception of luxuries) are usually regressive, because the share of personal income consumed or spent on a specific good declines as the rate of personal income rises. Poll taxes (also called head taxes), nominated as a set amount per capita, clearly are regressive.

It is not easy to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of uncertainty around 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 essentially on whether a national or a subnational (that is, provincial or state) tax is being determined.

In considering the economic effects of taxation, it is essential to differentiate between several concepts of tax rates. The statutory rates include those dictated in legislature; often these are marginal rates, but sometimes they are median rates. Marginal income tax rates denote the fraction of incremental income that is demanded by taxation when income is increased by one dollar. So, if tax liability increases by 45 cents when income increases 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 should take into account provisions as well as the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) declines by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points greater than nominated in the statutory rates. Since marginal rates signify how after-tax income increases or decreases in response to changes in before-tax income, they are the appropriate ones for regarding incentive effects of taxation. It is even more complicated to nominate the marginal effective tax rate applied to income from business and capital, as it may be dependant on factors such as 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 indicate the portion of total income that is required in taxation. The pattern of average rates is the one that is necessary for judging the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates commonly rise with income, both because personal allowances are granted for the taxpayer and dependents and also due to that marginal tax rates are graduated; on the flip side, preferential treatment of income received predominantly by high-income households can swamp these effects, allowing regressivity, as shown by average tax rates that lessen as income rises.

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