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Taxes can be differentiated by the impact they have on the placement of income and wealth. A proportional tax is a kind that impinges the same relative burden on all taxpayers—i.e., where tax liability and income grow in relative levels. A progressive tax is recognised by a higher than proportional increase in the tax liability in relation to the increase in income, and a regressive tax is recognised by a less than proportional growth in the related liability. Hence, progressive taxes are regarded as reducing inequity in income distribution, while regressive taxes are believed to result in an increase these inequalities.

The taxes that are normally regarded as progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, may become less so in the upper-income demographic—especially if a taxpayer is permitted to reduce his tax base by claiming deductions or by removing some income components from his taxable income. Proportional tax rates when applied to lower-income groups will also be more progressive if such personal exemptions are declared.

Income measured over the course of a given year might not definitely offer the most appropriate measure of taxpaying status. For example, transitory growth in income could be saved, and in temporary declines in income a taxpayer could elect to pay for consumption by reducing savings. So, if taxation is made comparable along with “permanent income,” it can be less regressive (or more progressive) than if it is compared with annual income.

Sales taxes and excises (excepting those on luxuries) are generally regressive, because the share of one’s income consumed or spent on a specific good decreases as the level of personal income grows. Poll taxes (aka head taxes), calculated as a fixed amount per capita, patently are regressive.

It is not simple to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of the uncertainty about 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 considered.

In considering the economic effects of taxation, it is relevant to distinguish between differing points of tax rates. The statutory rates are those specified in the law; generally speaking these are marginal rates, but for some cases they are median rates. Marginal income tax rates indicate the fraction of incremental income taken by taxation when income increases by one dollar. Therefore, if tax burden rises by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax laws usually contain graduated marginal rates—i.e., rates that grow as income grows. Heavy analysis of marginal tax rates should take into account provisions other than 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 greater than indicated 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 complicated to know the marginal effective tax rate applied to income from business and capital, because it may be reliant on such factors 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 nothing under a consumption-based tax.

Average income tax rates display the part of total income that is demanded in taxation. The pattern of average rates is the one that is important for considering 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 provided 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 could dwarf these effects, allowing regressivity, as indicated by average tax rates that decrease as income grows.

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