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Taxes can be differentiated by the effect they have on the placement of income and wealth. A proportional tax is the kind that impinges the same relative requirement on all the taxpayers—i.e., in the case where tax liability and income move in equal levels. A progressive tax is characterizable by a larger than proportional rise in the tax burden in regard to the increase in income, and a regressive tax is characterizable by a less than proportional increase in the related burden. Therefore, progressive taxes are thought of as reducing a lack of equality in income distribution, but regressive taxes can 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 nominally progressive, however, might become less so in the upper-income demographic—especially if a taxpayer is able to lower his tax base by declaring deductions or by taking particular income components from his taxable income. Proportional tax rates when applied to lower-income groups would also be more progressive if such exemptions of a personal nature are claimed.

Income measured over the period of a given year might not absolutely offer the most suitable measure of taxpaying requirement. For example, transitory rises in income might be saved, and within temporary declines in income a taxpayer may elect to provide for consumption by decreasing savings. Thus, if taxation is held in comparison alongside “permanent income,” it should be less regressive (or more progressive) than if it is held in comparison with annual income.

Sales taxes and excises (with the exception of luxuries) are mostly regressive, because the spread of individual income consumed or spent on a specific good lowers as the amount of personal income increases. Poll taxes (aka head taxes), calculated as a standard amount per capita, clearly are regressive.

It is hard to classify corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of 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 rests crucially on whether a national or a subnational (that is, provincial or state) tax is being decided.

In regarding the economic effects of taxation, it is important to distinguish between varied concepts of tax rates. The statutory rates include those specified in legislation; commonly these are marginal rates, but for some cases they are mean rates. Marginal income tax rates denote the fraction of incremental income taken by taxation when income rises by one dollar. Therefore, if tax burden grows by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax statutes often contain graduated marginal rates—i.e., rates that increase as income rises. Structured analysis of marginal tax rates need to take into account 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 increase in income, the marginal rate is 20 percentage points greater than indicated by the statutory rates. Since marginal rates signify how after-tax income moves in response to changes in before-tax income, they are the appropriate ones for assessing incentive effects of taxation. It is even more complicated to realise the marginal effective tax rate applicable to income from business and capital, as it may depend on factors including 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 show the percentage of total income that is taken 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 generally rise with income, both because personal allowances are granted for the taxpayer and dependents and because marginal tax rates are graduated; on the other side of things, preferential treatment of income received for the most part by high-income households could dampen these effects, producing regressivity, as displayed by average tax rates that lower as income rises.

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