Taxes are differentiated by the effect they have on the placement of income and wealth. A proportional tax is a kind that impinges the same relative onus on each taxpayer—i.e., when tax liability and income move in the same scale. A progressive tax is recognised by a more than proportional increase in the tax onus relative to the rise in income, and a regressive tax is characterizable by a less than proportional increase in the comparable onus. So, progressive taxes are viewed as fighting inequity in income distribution, while regressive taxes might have the effect of an increase in these inequalities.

The taxes that are normally considered progressive include individual income taxes and estate taxes. Income taxes that are declarably progressive, however, may become less so for the upper-income group—in particular if a taxpayer is allowed to lessen his tax base by claiming deductions or by taking some income parts from his taxable income. Proportional tax rates that are applied to lower-income groups would also be more progressive if exemptions of a personal nature are made.

Income measured over the course of a given period might not definitely give the most appropriate measure of taxpaying requirement. For example, transitory increases in income may be saved, and in temporary declines in income a taxpayer may decide to finance consumption by taking from savings. So, if taxation is held in comparison alongside “permanent income,” it should be less regressive (or more progressive) than if it is made comparable with annual income.

Sales taxes and excises (save on luxuries) are mostly regressive, because the dissemination of personal income consumed or spent for specific goods declines as the rate of personal income is raised. Poll taxes (also known as head taxes), calculated as a fixed amount per capita, clearly are regressive.

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

In assessing the economic purposes of taxation, it is necessary to distinguish between varied points of tax rates. The statutory rates include those nominated in legislature; generally these are marginal rates, but for some cases they are median rates. Marginal income tax rates signify the fraction of incremental income taken by taxation when income rises by one dollar. So, if tax liability grows by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax laws generally contain graduated marginal rates—i.e., rates that increase as income increases. Careful 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 higher than specified by the statutory rates. Since marginal rates indicate how after-tax income increases or decreases in response to changes in before-tax income, they are the necessary ones for considering incentive effects of taxation. It is even more complicated to nominate the marginal effective tax rate applied to income from business and capital, because it may be reliant 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 show the percentage of total income that is required in taxation. The pattern of average rates is the one that is important for appraising the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates usually increase with income, both because personal allowances are permitted for the taxpayer and dependents and also 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 might dampen these effects, forcing regressivity, as indicated by average tax rates that fall as income grows.

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