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Taxes can be distinguished by the impact they have on the allocation of income and wealth. A proportional tax is a kind that imposes the same relative onus on all taxpayers—i.e., where tax liability and income grow in the same scale. A progressive tax is recognisable by a more than proportional rise in the tax burden in regard to the rise in income, and a regressive tax is characterized by a less than proportional increase in the relative liability. So, progressive taxes are thought of as removing the lack of equality in income distribution, whereas regressive taxes may have the result of an increase in these inequalities.

The taxes that are often considered progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, could become less so for the upper-income demographic—especially if a taxpayer is permitted to lower his tax base by claiming deductions or by taking some certain income components from his taxable income. Proportional tax rates if applied to lower-income categories could also be more progressive if exemptions of a personal nature are declared.

Income measured over the course of a given period does not absolutely come up with the most accurate measure of taxpaying requirements. For example, transitory increases in income may be saved, and during temporary declines in income a taxpayer might opt to provide for consumption by reducing savings. Therefore, if taxation is compared with “permanent income,” it will be less regressive (or more progressive) than if it is compared with annual income.

Sales taxes and excises (excepting those on luxuries) are generally regressive, because the dissemination of own income consumed or spent on a specific good declines as the rate of personal income rises. Poll taxes (aka head taxes), nominated as a fixed amount per capita, obviously are regressive.

It is complicated to dictate 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 deciding who bears the tax burden is dependant crucially on whether a national or a subnational (that is, provincial or state) tax is being determined.

In assessing the economic effects of taxation, it is relevant to distinguish between varied points of tax rates. The statutory rates will include those nominated in the legislation; generally these are marginal rates, but occasionally they are mean rates. Marginal income tax rates denote the fraction of incremental income demanded by taxation when income grows by one dollar. Thus, if tax burden grows by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax legislation commonly contain graduated marginal rates—i.e., rates that grow as income rises. Heavy analysis of marginal tax rates need to consider provisions other than the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) declines by 20 cents for each one-dollar increase in income, the marginal rate is 20 percentage points more than nominated by the statutory rates. Since marginal rates display how after-tax income increases or decreases in response to changes in before-tax income, they are the appropriate ones for appraising incentive effects of taxation. It is even more complicated to nominate the marginal effective tax rate to apply 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 zero under a consumption-based tax.

Average income tax rates signify the part of total income that is demanded in taxation. The pattern of average rates is the one that is relevant for considering the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates generally grow with income, both because personal allowances are provided for the taxpayer and dependents and due to that marginal tax rates are graduated; on the flip side, preferential treatment of income received mostly by high-income households can swamp these effects, producing regressivity, as shown by average tax rates that lessen as income rises.

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