Taxes are 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 taxpayers—i.e., when tax liability and income grow in relative levels. A progressive tax is characterizable by a larger than proportional growth in the tax onus relative to the growth in income, and a regressive tax is characterized by a less than proportional rise in the relative burden. So, progressive taxes are viewed as reducing inequity in income distribution, whereas regressive taxes may have the result of an increase in these inequalities.

The taxes that are usually considered progressive include individual income taxes and estate taxes. Income taxes that are initially progressive, however, can become less so within the upper-income demographic—particularly if a taxpayer is permitted to lessen his tax base by nominating deductions or by taking certain income elements from his taxable income. Proportional tax rates which are applied to lower-income groups could also be more progressive if exemptions of a personal nature are claimed.

Income measured over a given period does not necessarily offer the best measure of taxpaying status. For example, transitory growth in income may be saved, and during temporary declines in income a taxpayer might opt to provide for consumption by reducing savings. So, if taxation is held in comparison alongside “permanent income,” it would be less regressive (or more progressive) than if held in comparison with annual income.

Sales taxes and excises (with the exception of luxuries) are usually regressive, because the spread of own income consumed or spent on specific goods declines as the amount of personal income is raised. Poll taxes (also called head taxes), nominated 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 because of 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 debated.

In considering the economic effect of taxation, it is relevant to differentiate between various concepts of tax rates. The statutory rates are those dictated in legislation; generally these are marginal rates, but in some cases they are average rates. Marginal income tax rates denote the fraction of incremental income taken by taxation when income grows by one dollar. Thus, if tax liability grows by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax statutes usually contain graduated marginal rates—i.e., rates that grow as income rises. Careful analysis of marginal tax rates are required to regard provisions in addition to the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) declines by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points higher than nominated in the statutory rates. Since marginal rates display how after-tax income changes in response to changes in before-tax income, they are the important ones for considering incentive effects of taxation. It is even more complicated to know the marginal effective tax rate to apply 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 determines that the marginal effective tax rate in income from capital is nil under a consumption-based tax.

Average income tax rates show the fraction of total income that is demanded in taxation. The pattern of average rates is the one that is important 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 granted for the taxpayer and dependents and due to that marginal tax rates are graduated; on the other hand, preferential treatment of income received for the most part by high-income households could dampen these effects, allowing regressivity, as displayed by average tax rates that decline as income rises.

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