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Taxes can be categorized by the effect they have on the allocation of income and wealth. A proportional tax is a tax that impinges the same relative requirement on all the taxpayers—i.e., in the case where tax liability and income grow in equal levels. A progressive tax is recognisable by a higher than proportional growth in the tax burden in relation to the increase in income, and a regressive tax is recognised by a less than proportional rise in the comparable onus. So, progressive taxes are regarded as taking away the lack of equality in income distribution, whereas regressive taxes might increase these inequalities.

The taxes that are often regarded as progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, could become less so within the upper-income categories—especially if a taxpayer is allowed to reduce his tax base by declaring deductions or by taking particular income components from his taxable income. Proportional tax rates which are applied to lower-income groups would also be more progressive if exemptions of a personal nature are declared.

Income measured over a given year does not definitely offer the most suitable measure of taxpaying requirements. For example, transitory rises in income can be saved, and during temporary declines in income a taxpayer may select to provide for consumption by decreasing savings. Ergo, if taxation is regarded along with “permanent income,” it will be less regressive (or more progressive) than if compared with annual income.

Sales taxes and excises (save on luxuries) are mostly regressive, because the dissemination of own income consumed or spent for a specific good decreases 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 hard to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to the 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 for the most part 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 necessary to distinguish between several points of tax rates. The statutory rates are those nominated in the legislation; usually these are marginal rates, but in some cases they are mean rates. Marginal income tax rates denote the fraction of incremental income that is demanded by taxation when income increases 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 often contain graduated marginal rates—i.e., rates that rise as income grows. Structured analysis of marginal tax rates are required to take into account provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) falls by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points more than nominated in the statutory rates. Since marginal rates display how after-tax income is changed in response to changes in before-tax income, they are the important ones for appraising incentive effects of taxation. It is even more difficult to understand the marginal effective tax rate applicable to income from business and capital, because it may be reliant on such considerations as 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 signify the fraction 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 generally grow with income, both because personal allowances are provided for the taxpayer and dependents and also due to that marginal tax rates are graduated; on the other side of things, preferential treatment of income received fundamentally by high-income households might swamp these effects, allowing regressivity, as shown by average tax rates that decline as income rises.

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