Taxes can be distinguished by the impact they have on the placement of income and wealth. A proportional tax is a kind that impinges the same relative onus on all taxpayers—i.e., where tax liability and income move in relative levels. A progressive tax is characterizable by a greater than proportional increase in the tax burden in regard to the growth in income, and a regressive tax is characterizable by a less than proportional increase in the relative burden. Hence, progressive taxes are thought of as removing inequalities in income distribution, but regressive taxes are believed to result in an increase these inequalities.

The taxes that are generally thought to be progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, can become less so for the upper-income categories—in particular 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 when applied to lower-income categories would also be more progressive if personal exemptions are claimed.

Income measured over a given year might not necessarily give the most suitable measure of taxpaying requirements. For example, transitory growth in income can be saved, and within temporary declines in income a taxpayer could choose to pay for consumption by decreasing savings. Thus, if taxation is held in comparison along with “permanent income,” it will be less regressive (or more progressive) than when it is held in comparison with annual income.

Sales taxes and excises (save on luxuries) tend to be regressive, because the dissemination of one’s income consumed or spent for specific goods lessens as the amount of personal income rises. Poll taxes (also called head taxes), levied as a set amount per capita, clearly are regressive.

It is not easy to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of a lack of certainty regarding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of dictating who bears the tax burden rests crucially 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 essential to differentiate between differing concepts of tax rates. The statutory rates are those nominated in law; generally these are marginal rates, but for some cases they are median rates. Marginal income tax rates denote the fraction of incremental income that is taken by taxation when income rises by one dollar. Hence, if tax onus rises by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax regulations often contain graduated marginal rates—i.e., rates that grow as income increases. Structured analysis of marginal tax rates must consider provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lowers by 20 cents for each one-dollar increase in income, the marginal rate is 20 percentage points higher than nominated by the statutory rates. Since marginal rates indicate how after-tax income changes in response to changes in before-tax income, they are the necessary ones for regarding incentive effects of taxation. It is even more difficult to realise the marginal effective tax rate to apply to income from business and capital, as it may be reliant on factors including 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 indicate the fraction of total income that is paid in taxation. The pattern of average rates is the one that is necessary for assessing 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 because marginal tax rates are graduated; conversely, preferential treatment of income received for the most part by high-income households can dwarf these effects, producing regressivity, as indicated by average tax rates that decrease as income grows.

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