Taxes are categorized by the effect they have on the distribution of income and wealth. A proportional tax is one that imposes the same relative liability on every taxpayer—i.e., in the case where tax liability and income increase in relative scale. A progressive tax is characterizable by a more than proportional growth in the tax burden relative to the increase in income, and a regressive tax is recognisable by a less than proportional growth in the comparative onus. So, progressive taxes are viewed as reducing the lack of equality in income distribution, whereas regressive taxes are seen to have the result of increasing these inequalities.

The taxes that are generally regarded as progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, can become less so in the upper-income categories—in particular if a taxpayer is able to lower his tax base by claiming deductions or by removing some particular income components from his taxable income. Proportional tax rates that are applied to lower-income categories would also be more progressive if exemptions of a personal nature are declared.

Income measured over the course of a given period might not necessarily come up with the most appropriate measure of taxpaying ability. For example, transitory increases in income might be saved, and during temporary declines in income a taxpayer could select to pay for consumption by reducing savings. Therefore, if taxation is made comparable along with “permanent income,” it will be less regressive (or more progressive) than if it is held in comparison with annual income.

Sales taxes and excises (save luxuries) are usually regressive, because the share of one’s income consumed or spent on specific goods lowers as the level of personal income is raised. Poll taxes (also called head taxes), levied as a standard amount per capita, patently are regressive.

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

In regarding the economic purposes of taxation, it is essential to differentiate between several concepts of tax rates. The statutory rates will include those nominated in the legislation; usually these are marginal rates, but in some cases they are median rates. Marginal income tax rates indicate the fraction of incremental income that is demanded by taxation when income rises by one dollar. So, if tax burden increases by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax laws often contain graduated marginal rates—i.e., rates that increase as income increases. Heavy analysis of marginal tax rates should review provisions other than the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lessens 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 display how after-tax income moves in response to changes in before-tax income, they are the appropriate ones for considering incentive effects of taxation. It is even more difficult to realise the marginal effective tax rate to apply to income from business and capital, since it may be reliant on considerations such 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 signify the percentage of total income that is demanded in taxation. The pattern of average rates is the one that is necessary for appraising the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income. Average income tax rates commonly rise with income, both because personal allowances are permitted for the taxpayer and dependents and due to that marginal tax rates are graduated; on the flip side, preferential treatment of income received fundamentally by high-income households may dwarf these effects, allowing regressivity, as signified by average tax rates that lower as income increases.

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