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Taxes can be categorized by the impact they have on the allocation of income and wealth. A proportional tax is a kind that puts the same relative requirement on every taxpayer—i.e., in the case where tax liability and income move in equal proportion. A progressive tax is characterizable by a higher than proportional rise in the tax burden in relation to the growth in income, and a regressive tax is characterized by a less than proportional increase in the comparable burden. Thus, progressive taxes are seen as reducing inequity in income distribution, but regressive taxes might 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, might become less so within the upper-income class—especially if a taxpayer is able to lessen his tax base by declaring deductions or by taking particular income components from his taxable income. Proportional tax rates when applied to lower-income groups could also be more progressive if personal exemptions are declared.

Income measured over the period of a year does not definitely come up with the most suitable measure of taxpaying ability. For example, transitory rises in income could be saved, and during temporary declines in income a taxpayer might select to pay for consumption by taking from savings. Thus, if taxation is compared along with “permanent income,” it will be less regressive (or more progressive) than if it is held in comparison with annual income.

Sales taxes and excises (with the exception of those on luxuries) are usually regressive, because the dissemination of own income consumed or spent on specific goods declines as the rate of personal income is raised. Poll taxes (aka head taxes), calculated as a standard amount per capita, patently are regressive.

It is not easy to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of uncertainty about the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of dictating who bears the tax burden is dependant essentially on whether a national or a subnational (that is, provincial or state) tax is being debated.

In assessing the economic effects of taxation, it is important to distinguish between various concepts of tax rates. The statutory rates will be specified in law; generally these are marginal rates, but for some cases they are average rates. Marginal income tax rates denote the fraction of incremental income taken by taxation when income is increased by one dollar. Therefore, if tax burden grows by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax statutes usually contain graduated marginal rates—i.e., rates that grow 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) reduces by 20 cents for each one-dollar growth 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 important ones for assessing incentive effects of taxation. It is even more difficult to know the marginal effective tax rate to apply to income from business and capital, since it may depend on such factors 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 indicate the fraction of total income that is demanded 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 rise with income, both because personal allowances are granted for the taxpayer and dependents and because marginal tax rates are graduated; on the other side of things, preferential treatment of income received for the most part by high-income households could swamp these effects, allowing regressivity, as signified by average tax rates that decrease as income increases.

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