Taxes are distinguished by the effect they have on the distribution of income and wealth. A proportional tax is a tax that imposes the same relative liability on all taxpayers—i.e., when tax liability and income increase in equal scale. A progressive tax is recognised by a greater than proportional increase in the tax burden in relation to the growth in income, and a regressive tax is characterized by a less than proportional rise in the comparable burden. Therefore, progressive taxes are regarded as taking away the lack of equality in income distribution, while regressive taxes are seen to result in an increase these inequalities.

The taxes that are often 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 group—particularly if a taxpayer is allowed to lower his tax base by nominating deductions or by removing particular income parts from his taxable income. Proportional tax rates if applied to lower-income demographics would also be more progressive if such personal exemptions are declared.

Income measured over a given year might not absolutely provide the most accurate measure of taxpaying status. For example, transitory rises in income might be saved, and during temporary declines in income a taxpayer might elect to finance consumption by taking from savings. So, if taxation is regarded along with “permanent income,” it should be less regressive (or more progressive) than if held in comparison with annual income.

Sales taxes and excises (except those on luxuries) are generally regressive, because the share of own income consumed or spent on a specific good declines as the level of personal income rises. Poll taxes (also called head taxes), levied as a fixed amount per capita, obviously are regressive.

It is difficult to classify corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of the uncertainty regarding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating who bears the tax burden depends 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 relevant to distinguish between several points of tax rates. The statutory rates are specified in the legislation; often these are marginal rates, but occasionally they are median rates. Marginal income tax rates signify the fraction of incremental income that is taken by taxation when income increases by one dollar. Ergo, if tax burden grows by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax regulations commonly contain graduated marginal rates—i.e., rates that grow as income rises. Heavy analysis of marginal tax rates must consider 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 increase in income, the marginal rate is 20 percentage points higher than nominated within the statutory rates. Since marginal rates display how after-tax income moves in response to changes in before-tax income, they are the appropriate ones for assessing incentive effects of taxation. It is even more complicated to realise the marginal effective tax rate to apply to income from business and capital, because it may depend on considerations such 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 nil under a consumption-based tax.

Average income tax rates signify the part of total income that is paid in taxation. The pattern of average rates is the one that is relevant for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates commonly increase with income, both because personal allowances are allowed for the taxpayer and dependents and due to that marginal tax rates are graduated; conversely, preferential treatment of income received mostly by high-income households can dwarf these effects, forcing regressivity, as displayed by average tax rates that fall as income grows.

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