Taxes can be distinguished by the effect they have on the placement of income and wealth. A proportional tax is the kind of tax that impinges the same relative requirement on all taxpayers—i.e., when tax liability and income move in equal levels. A progressive tax is characterized by a higher than proportional growth in the tax liability in regard to the increase in income, and a regressive tax is recognised by a less than proportional rise in the comparative liability. Thus, progressive taxes are regarded as fighting inequalities in income distribution, but regressive taxes may increase these inequalities.

The taxes that are often believed to be progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, can become less so within the upper-income categories—especially if a taxpayer is permitted to lessen his tax base by nominating deductions or by taking some certain income aspects from his taxable income. Proportional tax rates when applied to lower-income classes will also be more progressive if personal exemptions are declared.

Income measured over a given year does not definitely come up with the best measure of taxpaying requirement. For example, transitory rises in income can be saved, and in temporary declines in income a taxpayer may opt to finance consumption by decreasing savings. So, if taxation is held in comparison along with “permanent income,” it would be less regressive (or more progressive) than if held in comparison with annual income.

Sales taxes and excises (with the exception of those on luxuries) tend to be regressive, because the dissemination of personal income consumed or spent for a specific good declines as the rate of personal income rises. Poll taxes (also called head taxes), calculated as a set amount per capita, clearly are regressive.

It is difficult to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to the uncertainty about the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of deciding who bears the tax burden lays 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 essential to differentiate between several concepts of tax rates. The statutory rates are dictated in legislation; usually these are marginal rates, but in some cases they are median rates. Marginal income tax rates signify the fraction of incremental income taken by taxation when income increases by one dollar. Ergo, if tax onus increases by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax statutes generally contain graduated marginal rates—i.e., rates that grow as income rises. Structured analysis of marginal tax rates must review provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) declines by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points more than indicated within 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 necessary ones for appraising incentive effects of taxation. It is even more difficult to understand the marginal effective tax rate to apply to income from business and capital, because it may be dependant on considerations such as the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem holds that the marginal effective tax rate in income from capital is zero under a consumption-based tax.

Average income tax rates indicate the fraction of total income that is taken 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 grows with income. Average income tax rates generally grow with income, both because personal allowances are granted for the taxpayer and dependents and also because marginal tax rates are graduated; on the other hand, preferential treatment of income received mostly by high-income households could swamp these effects, allowing regressivity, as shown by average tax rates that decline as income grows.

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