Taxes are distinguished by the impact they have on the distribution of income and wealth. A proportional tax is a tax that applies the same relative onus on each taxpayer—i.e., where tax liability and income move in equal levels. A progressive tax is characterizable by a larger than proportional growth in the tax burden relative to the growth in income, and a regressive tax is recognisable by a less than proportional rise in the relative onus. Thus, progressive taxes are viewed as fighting inequalities in income distribution, while regressive taxes can have the result of increasing these inequalities.

The taxes that are generally considered progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, may become less so in the upper-income class—in particular if a taxpayer is able to reduce his tax base by claiming deductions or by leaving out some income components from his taxable income. Proportional tax rates if applied to lower-income classes can also be more progressive if personal exemptions are declared.

Income measured over a given period might not definitely come up with the best measure of taxpaying requirements. For example, transitory growth in income might be saved, and during temporary declines in income a taxpayer may decide to finance consumption by decreasing savings. Ergo, if taxation is compared along with “permanent income,” it can be less regressive (or more progressive) than when compared with annual income.

Sales taxes and excises (excepting luxuries) are mostly regressive, because the spread of own income consumed or spent for specific goods lessens as the amount of personal income rises. Poll taxes (aka head taxes), nominated as a flat amount per capita, patently are regressive.

It is difficult to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally due to a lack of certainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating who bears the tax burden rests fundamentally on whether a national or a subnational (that is, provincial or state) tax is being decided.

In considering the economic purpose of taxation, it is important to distinguish between varied ideas of tax rates. The statutory rates will be specified in the legislation; often these are marginal rates, but in some cases they are average rates. Marginal income tax rates signify the fraction of incremental income that is taken by taxation when income rises by one dollar. So, if tax liability increases by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax legislation generally contain graduated marginal rates—i.e., rates that increase as income rises. Heavy analysis of marginal tax rates need to take into account 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 growth in income, the marginal rate is 20 percentage points more than nominated by the statutory rates. Since marginal rates display how after-tax income increases or decreases in response to changes in before-tax income, they are the necessary ones for appraising incentive effects of taxation. It is even more difficult to nominate the marginal effective tax rate to apply to income from business and capital, since it may rely on such considerations 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 display the portion of total income that is demanded in taxation. The pattern of average rates is the one that is in consideration for judging the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates usually increase with income, both because personal allowances are permitted for the taxpayer and dependents and due to that marginal tax rates are graduated; conversely, preferential treatment of income received for the most part by high-income households could swamp these effects, forcing regressivity, as displayed by average tax rates that decrease as income rises.

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