Taxes can be differentiated by the impact they have on the distribution of income and wealth. A proportional tax is a kind that places the same relative liability on every taxpayer—i.e., in the case where tax liability and income increase in equal proportion. A progressive tax is recognisable by a higher than proportional growth in the tax onus relative to the increase in income, and a regressive tax is recognised by a less than proportional increase in the relative burden. Thus, progressive taxes are regarded as reducing the lack of equality in income distribution, whereas regressive taxes might increase these inequalities.

The taxes that are normally thought to be progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, might become less so within the upper-income categories—in particular if a taxpayer is able to lower his tax base by nominating deductions or by removing certain income parts from his taxable income. Proportional tax rates when applied to lower-income groups can also be more progressive if personal exemptions are claimed.

Income measured over a given period might not absolutely come up with the most appropriate measure of taxpaying ability. For example, transitory increases in income may be saved, and within temporary declines in income a taxpayer might select to finance consumption by taking from savings. Thus, if taxation is held in comparison along with “permanent income,” it can be less regressive (or more progressive) than when compared with annual income.

Sales taxes and excises (except luxuries) are mostly regressive, because the dissemination of own income consumed or spent on a specific good decreases as the rate of personal income is raised. Poll taxes (aka head taxes), nominated as a fixed amount per capita, clearly are regressive.

It is not easy to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally due to 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 for the most part on whether a national or a subnational (that is, provincial or state) tax is being decided.

In analysing the economic effect of taxation, it is essential to differentiate between varied ideas of tax rates. The statutory rates include those nominated in legislation; usually these are marginal rates, but sometimes they are median rates. Marginal income tax rates denote the fraction of incremental income taken by taxation when income increases by one dollar. Therefore, if tax onus grows by 45 cents when income grows 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 grows. Careful analysis of marginal tax rates should review provisions apart from the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) falls by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points greater than specified in the statutory rates. Since marginal rates signify how after-tax income increases or decreases in response to changes in before-tax income, they are the relevant ones for considering incentive effects of taxation. It is even more complicated to nominate the marginal effective tax rate applicable to income from business and capital, as it may be reliant on factors including 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 nothing under a consumption-based tax.

Average income tax rates indicate the percentage of total income that is required in taxation. The pattern of average rates is the one that is relevant for appraising the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates generally increase with income, both because personal allowances are provided for the taxpayer and dependents and 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 could dampen these effects, forcing regressivity, as indicated by average tax rates that decline as income increases.

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