Taxes are categorized by the effect they have on the distribution of income and wealth. A proportional tax is one that applies the same relative liability on all the taxpayers—i.e., where tax liability and income increase in equal scale. A progressive tax is characterized by a higher than proportional growth in the tax liability relative to the growth in income, and a regressive tax is characterized by a less than proportional increase in the comparative onus. So, progressive taxes are viewed as removing the lack of equality in income distribution, but regressive taxes might have the effect of increasing these inequalities.

The taxes that are normally considered progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, could become less so in the upper-income group—especially if a taxpayer is permitted to lower his tax base by claiming deductions or by leaving out certain income components from his taxable income. Proportional tax rates which are applied to lower-income demographics would also be more progressive if such exemptions of a personal nature are made.

Income measured over a given period does not absolutely provide the most appropriate measure of taxpaying ability. For example, transitory growth in income can be saved, and in temporary declines in income a taxpayer may choose to provide for consumption by reducing savings. Ergo, if taxation is held in comparison alongside “permanent income,” it will be less regressive (or more progressive) than if it is made comparable with annual income.

Sales taxes and excises (except those on luxuries) are usually regressive, because the dissemination of individual income consumed or spent for a specific good lessens as the rate of personal income is raised. Poll taxes (also termed head taxes), levied as a standard amount per capita, clearly are regressive.

It is hard to classify corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to uncertainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of deciding who bears the tax burden lays fundamentally 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 necessary to differentiate between various ideas of tax rates. The statutory rates include those specified in legislation; commonly these are marginal rates, but for some cases they are median rates. Marginal income tax rates note the fraction of incremental income that is taken by taxation when income grows by one dollar. Thus, if tax onus grows by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax statutes often contain graduated marginal rates—i.e., rates that increase as income grows. Heavy analysis of marginal tax rates should regard provisions as well as 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 specified in the statutory rates. Since marginal rates specify how after-tax income is changed in response to changes in before-tax income, they are the necessary ones for considering incentive effects of taxation. It is even more difficult to realise the marginal effective tax rate applicable to income from business and capital, since it may depend on such considerations as the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem determines that the marginal effective tax rate in income from capital is nil under a consumption-based tax.

Average income tax rates show the fraction of total income that is taken in taxation. The pattern of average rates is the one that is important for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates generally 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 mostly by high-income households could dwarf these effects, allowing regressivity, as signified by average tax rates that lower as income rises.

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