Taxes are differentiated by the impact they have on the allocation of income and wealth. A proportional tax is one that imposes the same relative requirement on all taxpayers—i.e., where tax liability and income move in equal scale. A progressive tax is characterized by a higher than proportional rise in the tax onus relative to the rise in income, and a regressive tax is recognisable by a less than proportional growth in the related burden. Hence, progressive taxes are thought of as taking away inequity in income distribution, but regressive taxes are found to have the result of increasing these inequalities.

The taxes that are usually regarded as progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, may become less so for the upper-income class—especially if a taxpayer is able to reduce his tax base by nominating deductions or by excluding some particular income components from his taxable income. Proportional tax rates which are applied to lower-income classes could also be more progressive if exemptions of a personal nature are claimed.

Income measured over the course of a given period might not definitely provide the most accurate measure of taxpaying status. For example, transitory growth in income could be saved, and during temporary declines in income a taxpayer could select to pay for consumption by decreasing savings. Therefore, if taxation is compared alongside “permanent income,” it can be less regressive (or more progressive) than when it is held in comparison with annual income.

Sales taxes and excises (with the exception of luxuries) are usually regressive, because the dissemination of personal income consumed or spent for a specific good lowers as the amount of personal income increases. Poll taxes (also called head taxes), calculated as a flat amount per capita, patently are regressive.

It is complicated to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally due to the uncertainty regarding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of dictating who bears the tax burden lays essentially on whether a national or a subnational (that is, provincial or state) tax is being decided.

In considering the economic effects of taxation, it is relevant to differentiate between differing points of tax rates. The statutory rates will include those dictated in law; commonly these are marginal rates, but sometimes they are mean rates. Marginal income tax rates signify the fraction of incremental income demanded by taxation when income increases by one dollar. Thus, if tax liability increases by 45 cents when income rises 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 rises. Heavy analysis of marginal tax rates should review provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) reduces by 20 cents for each one-dollar growth in income, the marginal rate is 20 percentage points higher than indicated by the statutory rates. Since marginal rates specify how after-tax income moves in response to changes in before-tax income, they are the relevant ones for assessing incentive effects of taxation. It is even more difficult to nominate the marginal effective tax rate to apply to income from business and capital, as it may depend on such factors as 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 display the portion of total income that is paid 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 grows with income. Average income tax rates generally rise with income, both because personal allowances are provided for the taxpayer and dependents and due to that marginal tax rates are graduated; on the other side of things, preferential treatment of income received predominantly by high-income households can swamp these effects, producing regressivity, as displayed by average tax rates that decrease as income rises.

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