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Taxes are categorized by the impact they have on the placement of income and wealth. A proportional tax is one that puts the same relative burden on all the taxpayers—i.e., where tax liability and income increase in equal proportion. A progressive tax is recognised by a more than proportional increase in the tax burden in regard to the rise in income, and a regressive tax is recognisable by a less than proportional rise in the relative onus. Thus, progressive taxes are seen as taking away the lack of equality in income distribution, but regressive taxes may have the result of increasing these inequalities.

The taxes that are generally thought to be progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, may become less so for the upper-income class—in particular if a taxpayer is able to lessen his tax base by declaring deductions or by leaving out some certain income elements from his taxable income. Proportional tax rates that are applied to lower-income demographics would also be more progressive if personal exemptions are claimed.

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

Sales taxes and excises (save those on luxuries) are mostly regressive, because the spread of personal income consumed or spent on specific goods declines as the level of personal income is raised. Poll taxes (aka head taxes), calculated as a flat amount per capita, clearly are regressive.

It is complicated to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, principally because of the uncertainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of deciding who bears the tax burden rests fundamentally on whether a national or a subnational (that is, provincial or state) tax is being decided.

In assessing the economic effects of taxation, it is important to differentiate between differing ideas of tax rates. The statutory rates will include those dictated in legislature; often these are marginal rates, but for some cases they are average rates. Marginal income tax rates note the fraction of incremental income that is taken by taxation when income increases by one dollar. Thus, if tax burden increases by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax regulations generally contain graduated marginal rates—i.e., rates that grow as income increases. Structured analysis of marginal tax rates should review provisions apart from the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) decreases 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 specify how after-tax income changes in response to changes in before-tax income, they are the appropriate ones for considering incentive effects of taxation. It is even more complicated to realise the marginal effective tax rate applicable to income from business and capital, since 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 determines that the marginal effective tax rate in income from capital is nil under a consumption-based tax.

Average income tax rates signify the part of total income that is demanded in taxation. The pattern of average rates is the one that is necessary 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 grow 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 side of things, preferential treatment of income received mostly by high-income households may swamp these effects, producing regressivity, as signified by average tax rates that decrease as income rises.

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