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Taxes are categorized by the impact they have on the placement of income and wealth. A proportional tax is one that impinges the same relative burden on all taxpayers—i.e., in the case where tax liability and income grow in relative proportion. A progressive tax is recognisable by a more than proportional increase in the tax burden in regard to the increase in income, and a regressive tax is characterizable by a less than proportional growth in the comparable onus. Hence, progressive taxes are regarded as removing inequalities in income distribution, but regressive taxes can increase these inequalities.

The taxes that are generally thought to be progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, can become less so in the upper-income categories—in particular if a taxpayer is allowed to lower his tax base by claiming deductions or by taking particular income aspects from his taxable income. Proportional tax rates when applied to lower-income demographics can also be more progressive if such personal exemptions are made.

Income measured over a given period may not absolutely give the most appropriate measure of taxpaying requirement. For example, transitory rises in income can be saved, and in temporary declines in income a taxpayer could select to pay for consumption by taking from savings. Therefore, if taxation is compared alongside “permanent income,” it would be less regressive (or more progressive) than if held in comparison with annual income.

Sales taxes and excises (except luxuries) are mostly regressive, because the share of individual income consumed or spent on a specific good lowers as the amount of personal income is raised. Poll taxes (also known as head taxes), calculated as a standard amount per capita, clearly are regressive.

It is not easy to classify corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to the lack of certainty regarding 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 fundamentally on whether a national or a subnational (that is, provincial or state) tax is being determined.

In assessing the economic effect of taxation, it is necessary to distinguish between varied points of tax rates. The statutory rates are those dictated in the law; commonly these are marginal rates, but occasionally they are average rates. Marginal income tax rates note the fraction of incremental income taken by taxation when income grows by one dollar. So, if tax onus rises by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax legislature commonly contain graduated marginal rates—i.e., rates that rise as income increases. Heavy analysis of marginal tax rates should review provisions as well as the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) reduces by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points higher than specified by the statutory rates. Since marginal rates specify how after-tax income moves in response to changes in before-tax income, they are the important ones for regarding incentive effects of taxation. It is even more complicated to understand the marginal effective tax rate applied to income from business and capital, because it may be dependant on factors including the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem shows that the marginal effective tax rate in income from capital is zero under a consumption-based tax.

Average income tax rates display the part of total income that is required in taxation. The pattern of average rates is the one that is important for considering 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 provided for the taxpayer and dependents and because marginal tax rates are graduated; on the flip side, preferential treatment of income received for the most part by high-income households may swamp these effects, producing regressivity, as displayed by average tax rates that decline as income increases.

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