Taxes can be categorized by the effect they have on the placement of income and wealth. A proportional tax is the kind of tax that applies the same relative requirement on all taxpayers—i.e., in the case where tax liability and income increase in equal proportion. A progressive tax is characterized by a more than proportional increase in the tax onus in relation to the growth in income, and a regressive tax is recognisable by a less than proportional increase in the comparable onus. Ergo, progressive taxes are regarded as fighting a lack of equality in income distribution, while regressive taxes are seen to have the effect of an increase in these inequalities.

The taxes that are usually regarded as progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, may become less so for the upper-income categories—particularly if a taxpayer is allowed to reduce his tax base by nominating deductions or by removing certain income parts from his taxable income. Proportional tax rates which are applied to lower-income classes would also be more progressive if personal exemptions are made.

Income measured over the course of a given period does not absolutely come up with the most accurate measure of taxpaying requirements. For example, transitory rises in income may be saved, and in temporary declines in income a taxpayer could elect to finance consumption by decreasing savings. Ergo, if taxation is compared along with “permanent income,” it will be less regressive (or more progressive) than when compared with annual income.

Sales taxes and excises (excepting luxuries) tend to be regressive, because the dissemination of personal income consumed or spent on a specific good lessens as the amount of personal income is raised. Poll taxes (also called head taxes), calculated as a fixed amount per capita, patently are regressive.

It is hard to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of uncertainty surrounding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of determining 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 determined.

In considering the economic purpose of taxation, it is important to distinguish between differing points of tax rates. The statutory rates include those dictated in law; usually these are marginal rates, but for some cases they are median rates. Marginal income tax rates note the fraction of incremental income that is demanded by taxation when income increases by one dollar. Therefore, if tax onus grows by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax statutes usually contain graduated marginal rates—i.e., rates that increase as income increases. Careful analysis of marginal tax rates should review provisions apart from the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lessens by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points greater than indicated in the statutory rates. Since marginal rates display how after-tax income moves in response to changes in before-tax income, they are the appropriate ones for appraising incentive effects of taxation. It is even more complicated to know the marginal effective tax rate applied to income from business and capital, as it may be dependant on considerations such as the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem shows that the marginal effective tax rate in income from capital is nil under a consumption-based tax.

Average income tax rates determine the portion of total income that is required 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 increases with income. Average income tax rates commonly 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 for the most part by high-income households could swamp these effects, allowing regressivity, as shown by average tax rates that lower as income grows.

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