Taxes are differentiated by the impact they have on the placement of income and wealth. A proportional tax is a kind that places the same relative liability on each taxpayer—i.e., where tax liability and income increase in the same levels. A progressive tax is characterized by a greater than proportional growth in the tax burden in relation to the rise in income, and a regressive tax is characterized by a less than proportional rise in the comparable onus. Hence, progressive taxes are viewed as reducing the lack of equality in income distribution, whereas regressive taxes are seen to cause an increase in these inequalities.

The taxes that are generally thought to be progressive include individual income taxes and estate taxes. Income taxes that are declarably progressive, however, can become less so in the upper-income categories—especially if a taxpayer is able to reduce his tax base by claiming deductions or by excluding certain income parts from his taxable income. Proportional tax rates that are applied to lower-income demographics can also be more progressive if personal exemptions are claimed.

Income measured over the period of a given year might not absolutely give the most appropriate measure of taxpaying status. For example, transitory increases in income could be saved, and within temporary declines in income a taxpayer may choose to pay for consumption by reducing savings. Ergo, if taxation is made comparable with “permanent income,” it can be less regressive (or more progressive) than when held in comparison with annual income.

Sales taxes and excises (save luxuries) are generally regressive, because the dissemination of own income consumed or spent for a specific good decreases as the rate of personal income rises. Poll taxes (also known as head taxes), nominated as a standard amount per capita, obviously are regressive.

It is complicated to classify corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to uncertainty regarding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of deciding 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 decided.

In regarding the economic effect of taxation, it is relevant to distinguish between various points of tax rates. The statutory rates will be nominated in legislation; often these are marginal rates, but in some cases they are median rates. Marginal income tax rates denote the fraction of incremental income demanded by taxation when income increases by one dollar. Ergo, if tax liability grows by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax legislation usually contain graduated marginal rates—i.e., rates that increase as income grows. Heavy analysis of marginal tax rates must review provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) declines by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points higher than specified by the statutory rates. Since marginal rates indicate how after-tax income changes in response to changes in before-tax income, they are the relevant ones for regarding incentive effects of taxation. It is even more complicated to understand the marginal effective tax rate to apply to income from business and capital, as 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 holds 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 demanded in taxation. The pattern of average rates is the one that is in consideration for considering the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates commonly rise with income, both because personal allowances are permitted for the taxpayer and dependents and also due to that marginal tax rates are graduated; on the flip side, preferential treatment of income received fundamentally by high-income households may swamp these effects, producing regressivity, as signified by average tax rates that decline as income rises.

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