Taxes are categorized by the impact they have on the allocation of income and wealth. A proportional tax is the kind that imposes the same relative onus on all the taxpayers—i.e., where tax liability and income grow in relative levels. A progressive tax is recognisable by a higher than proportional rise in the tax onus relative to the increase in income, and a regressive tax is recognisable by a less than proportional growth in the comparable liability. So, progressive taxes are regarded as taking away inequalities in income distribution, while regressive taxes are found to have the result of increasing these inequalities.

The taxes that are often considered progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, could become less so within the upper-income categories—particularly if a taxpayer is able to reduce his tax base by claiming deductions or by excluding some income parts from his taxable income. Proportional tax rates which are applied to lower-income demographics will also be more progressive if such exemptions of a personal nature are claimed.

Income measured over the period of a given year does not necessarily come up with the most appropriate measure of taxpaying ability. For example, transitory increases in income may be saved, and within temporary declines in income a taxpayer may select to provide for consumption by reducing savings. So, if taxation is regarded alongside “permanent income,” it can be less regressive (or more progressive) than if compared with annual income.

Sales taxes and excises (except luxuries) are mostly regressive, because the dissemination of own income consumed or spent for a specific good decreases as the amount of personal income increases. Poll taxes (also termed head taxes), calculated as a fixed amount per capita, patently are regressive.

It is not simple to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally due to the lack of certainty regarding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating who bears the tax burden rests for the most part on whether a national or a subnational (that is, provincial or state) tax is being decided.

In assessing the economic effect of taxation, it is important to distinguish between differing points of tax rates. The statutory rates will be dictated in the legislation; usually these are marginal rates, but sometimes they are median rates. Marginal income tax rates note the fraction of incremental income demanded by taxation when income is increased by one dollar. Thus, if tax onus rises by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax regulations commonly contain graduated marginal rates—i.e., rates that rise as income grows. Structured analysis of marginal tax rates should consider provisions in addition to 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 specified in the statutory rates. Since marginal rates display how after-tax income is changed in response to changes in before-tax income, they are the important ones for considering incentive effects of taxation. It is even more difficult to know the marginal effective tax rate to apply to income from business and capital, as it may rely on factors including 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 nothing under a consumption-based tax.

Average income tax rates indicate the part of total income that is required in taxation. The pattern of average rates is the one that is in consideration for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates usually increase with income, both because personal allowances are permitted for the taxpayer and dependents and because marginal tax rates are graduated; on the other hand, preferential treatment of income received predominantly by high-income households may swamp these effects, allowing regressivity, as shown by average tax rates that lower as income grows.

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