Taxes can be distinguished by the impact they have on the distribution of income and wealth. A proportional tax is the kind of tax that impinges the same relative requirement on all the taxpayers – i.e., where tax liability and income grow in relative levels. A progressive tax is characterizable by a more than proportional growth in the tax liability relative to the increase in income, and a regressive tax is characterized by a less than proportional increase in the related onus. Hence, progressive taxes are seen as reducing a lack of equality in income distribution, but regressive taxes are found to have the effect of increasing these inequalities.

The taxes that are normally believed to be progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, may become less so within the upper-income demographic – in particular if a taxpayer is permitted to lessen his tax base by declaring deductions or by leaving out certain income parts from his taxable income. Proportional tax rates if applied to lower-income categories will also be more progressive if such exemptions of a personal nature are claimed.

Income measured over a given period does not necessarily come up with the most accurate measure of taxpaying requirements. For example, transitory growth in income might be saved, and in temporary declines in income a taxpayer could select to finance consumption by taking from savings. So, if taxation is held in comparison along with “permanent income,”it should be less regressive (or more progressive) than when made comparable with annual income.

Sales taxes and excises (with the exception of those on luxuries) are generally regressive, because the share of individual income consumed or spent for specific goods declines as the rate of personal income increases. Poll taxes (aka head taxes), calculated as a standard amount per capita, patently are regressive.

It is hard to dictate corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to uncertainty surrounding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of deciding who bears the tax burden lays fundamentally on whether a national or a subnational (that is, provincial or state) tax is being considered.

In regarding the economic effects of taxation, it is relevant to differentiate between various ideas of tax rates. The statutory rates are nominated in legislation; often these are marginal rates, but sometimes they are median rates. Marginal income tax rates note the fraction of incremental income that is taken by taxation when income is increased by one dollar. So, if tax onus increases 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. Heavy analysis of marginal tax rates should consider 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 rise in income, the marginal rate is 20 percentage points higher than indicated in 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 appraising incentive effects of taxation. It is even more difficult to know the marginal effective tax rate to apply to income from business and capital, because it may be dependant on such factors 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 nothing under a consumption-based tax.

Average income tax rates signify the percentage of total income that is demanded in taxation. The pattern of average rates is the one that is important for assessing the distributional equity of taxation. Under a progressive income tax the average income tax rate grows with income.

Average earnings tax rates generally rise 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 for the most part by high-income households could swamp these effects, allowing regressivity, as indicated by average tax rates that fall as income increases.

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