Taxes can be distinguished by the impact they have on the placement of income and wealth. A proportional tax is one that places the same relative requirement on all taxpayers—i.e., when tax liability and income increase in relative proportion. A progressive tax is characterized by a more than proportional rise in the tax onus in relation to the increase in income, and a regressive tax is characterized by a less than proportional growth in the relative onus. Therefore, progressive taxes are regarded as fighting the lack of equality in income distribution, whereas regressive taxes are seen to cause 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, can become less so in the upper-income class—especially if a taxpayer is allowed to lessen his tax base by declaring deductions or by removing some particular income parts from his taxable income. Proportional tax rates that are applied to lower-income demographics could also be more progressive if such personal exemptions are declared.

Income measured over a given year does not necessarily provide the most appropriate measure of taxpaying requirement. For example, transitory increases in income could be saved, and in temporary declines in income a taxpayer may opt to provide for consumption by decreasing savings. Therefore, if taxation is held in comparison alongside “permanent income,” it would be less regressive (or more progressive) than if held in comparison with annual income.

Sales taxes and excises (excepting luxuries) tend to be regressive, because the spread of one’s income consumed or spent on a specific good lessens as the rate of personal income is raised. Poll taxes (aka head taxes), levied as a set amount per capita, patently are regressive.

It is hard to classify corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to the uncertainty surrounding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating who bears the tax burden is dependant crucially on whether a national or a subnational (that is, provincial or state) tax is being determined.

In analysing the economic purpose of taxation, it is relevant to differentiate between various ideas of tax rates. The statutory rates will include those nominated in law; generally these are marginal rates, but in some cases they are median rates. Marginal income tax rates signify the fraction of incremental income that is demanded by taxation when income rises by one dollar. Thus, if tax burden increases 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 rise as income grows. Careful analysis of marginal tax rates need to consider 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 more than nominated in the statutory rates. Since marginal rates specify how after-tax income increases or decreases 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 depend on considerations including 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 portion of total income that is paid in taxation. The pattern of average rates is the one that is necessary for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates generally increase with income, both because personal allowances are granted for the taxpayer and dependents and due to that marginal tax rates are graduated; on the other side of things, preferential treatment of income received predominantly by high-income households might dampen these effects, allowing regressivity, as signified by average tax rates that decrease as income grows.

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