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Taxes can be differentiated by the effect they have on the placement of income and wealth. A proportional tax is a kind that applies the same relative onus on every taxpayer—i.e., when tax liability and income increase in the same levels. A progressive tax is characterized by a greater than proportional rise in the tax onus in regard to the increase in income, and a regressive tax is characterizable by a less than proportional increase in the relative onus. So, progressive taxes are seen as taking away a lack of equality in income distribution, while regressive taxes might increase these inequalities.

The taxes that are normally believed to be progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, might become less so in the upper-income categories—particularly if a taxpayer is permitted to lessen his tax base by claiming deductions or by leaving out particular income aspects from his taxable income. Proportional tax rates when applied to lower-income groups will also be more progressive if exemptions of a personal nature are made.

Income measured over a given year might not necessarily offer the most accurate measure of taxpaying status. For example, transitory growth in income may be saved, and during temporary declines in income a taxpayer might elect to finance consumption by decreasing savings. Ergo, if taxation is compared along with “permanent income,” it should be less regressive (or more progressive) than when held in comparison with annual income.

Sales taxes and excises (save those on luxuries) are usually regressive, because the portion of personal income consumed or spent for specific goods lowers as the level of personal income increases. Poll taxes (aka head taxes), calculated as a set amount per capita, obviously are regressive.

It is not easy to term 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 rests essentially on whether a national or a subnational (that is, provincial or state) tax is being debated.

In analysing the economic purposes of taxation, it is important to differentiate between various ideas of tax rates. The statutory rates are those specified in law; often these are marginal rates, but for some cases they are median rates. Marginal income tax rates indicate the fraction of incremental income demanded by taxation when income grows by one dollar. Thus, if tax onus rises by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax legislature often contain graduated marginal rates—i.e., rates that grow as income increases. Structured analysis of marginal tax rates need to regard provisions other than 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 more than indicated within 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 assessing incentive effects of taxation. It is even more complicated to understand the marginal effective tax rate to apply to income from business and capital, because it may rely on factors such 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 display the percentage of total income that is taken in taxation. The pattern of average rates is the one that is important for appraising the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates usually grow with income, both because personal allowances are provided for the taxpayer and dependents and also due to that marginal tax rates are graduated; on the other hand, preferential treatment of income received mostly by high-income households might swamp these effects, allowing regressivity, as shown by average tax rates that decrease as income rises.

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