Taxes are categorized by the impact they have on the placement of income and wealth. A proportional tax is a kind that puts the same relative burden on every taxpayer—i.e., where tax liability and income move in relative levels. A progressive tax is characterizable by a higher than proportional increase in the tax burden relative to the growth in income, and a regressive tax is characterizable by a less than proportional increase in the comparative onus. Therefore, progressive taxes are thought of as taking away inequity in income distribution, but regressive taxes can have the effect of an increase in these inequalities.

The taxes that are generally considered progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, can become less so within the upper-income class—particularly if a taxpayer is able to lessen his tax base by nominating deductions or by removing some income elements from his taxable income. Proportional tax rates that are applied to lower-income classes will also be more progressive if exemptions of a personal nature are made.

Income measured over a given year does not definitely provide the most appropriate measure of taxpaying status. For example, transitory rises in income could be saved, and during temporary declines in income a taxpayer might decide to pay for consumption by reducing savings. Ergo, if taxation is held in comparison alongside “permanent income,” it should be less regressive (or more progressive) than if compared with annual income.

Sales taxes and excises (excepting luxuries) are generally regressive, because the portion of individual income consumed or spent for a specific good lowers as the rate of personal income rises. Poll taxes (aka head taxes), nominated as a flat amount per capita, obviously are regressive.

It is complicated to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of the lack of certainty surrounding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of dictating who bears the tax burden rests essentially on whether a national or a subnational (that is, provincial or state) tax is being debated.

In considering the economic effects of taxation, it is essential to distinguish between various points of tax rates. The statutory rates will include those specified in law; generally speaking these are marginal rates, but in some cases they are mean rates. Marginal income tax rates denote the fraction of incremental income demanded by taxation when income increases by one dollar. Therefore, if tax liability increases by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax regulations usually contain graduated marginal rates—i.e., rates that increase as income rises. 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) falls by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points greater than nominated in the statutory rates. Since marginal rates indicate how after-tax income increases or decreases in response to changes in before-tax income, they are the relevant ones for considering incentive effects of taxation. It is even more complicated to know the marginal effective tax rate applicable to income from business and capital, as it may be dependant on such considerations as the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem grants that the marginal effective tax rate in income from capital is zero under a consumption-based tax.

Average income tax rates display the percentage of total income that is demanded 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 rises with income. Average income tax rates commonly increase with income, both because personal allowances are permitted for the taxpayer and dependents and also due to that marginal tax rates are graduated; conversely, preferential treatment of income received mostly by high-income households might dampen these effects, allowing regressivity, as shown by average tax rates that decrease as income increases.

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