Taxes can be categorized by the effect they have on the distribution of income and wealth. A proportional tax is the kind of tax that imposes the same relative liability on all taxpayers—i.e., when tax liability and income grow in the same scale. A progressive tax is recognisable by a larger than proportional rise in the tax liability relative to the growth in income, and a regressive tax is characterizable by a less than proportional growth in the comparative onus. Therefore, progressive taxes are regarded as removing the lack of equality in income distribution, whereas regressive taxes can have the effect of increasing these inequalities.

The taxes that are generally thought to be progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, can become less so within the upper-income demographic—particularly if a taxpayer is permitted to lessen his tax base by nominating deductions or by removing some income components from his taxable income. Proportional tax rates which are applied to lower-income demographics could also be more progressive if personal exemptions are claimed.

Income measured over a given period may not necessarily give the most appropriate measure of taxpaying status. For example, transitory increases in income could be saved, and during temporary declines in income a taxpayer could choose to finance consumption by reducing savings. So, if taxation is held in comparison alongside “permanent income,” it will be less regressive (or more progressive) than if it is held in comparison with annual income.

Sales taxes and excises (excepting those on luxuries) are generally regressive, because the dissemination of own income consumed or spent on a specific good lessens as the level of personal income rises. Poll taxes (aka head taxes), calculated as a standard amount per capita, patently are regressive.

It is complicated to classify corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to a lack of certainty 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 essentially on whether a national or a subnational (that is, provincial or state) tax is being determined.

In analysing the economic effects of taxation, it is relevant to distinguish between varied points of tax rates. The statutory rates include those specified in the legislation; often these are marginal rates, but occasionally they are mean rates. Marginal income tax rates indicate the fraction of incremental income that is taken by taxation when income is increased by one dollar. Ergo, if tax burden rises by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax laws usually contain graduated marginal rates—i.e., rates that rise as income grows. Heavy analysis of marginal tax rates should consider provisions other than the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) decreases by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points more than nominated in the statutory rates. Since marginal rates signify how after-tax income moves in response to changes in before-tax income, they are the necessary ones for regarding incentive effects of taxation. It is even more complicated to understand the marginal effective tax rate applied to income from business and capital, as it may be dependant on factors including the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem grants that the marginal effective tax rate in income from capital is nil under a consumption-based tax.

Average income tax rates show the portion of total income that is required in taxation. The pattern of average rates is the one that is relevant for assessing 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 granted for the taxpayer and dependents and also because marginal tax rates are graduated; on the flip side, preferential treatment of income received for the most part by high-income households may dampen these effects, forcing regressivity, as signified by average tax rates that fall as income rises.

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