Taxes are differentiated by the impact they have on the placement of income and soveign wealth. A proportional tax is a kind that places the same relative onus on each taxpayer – i.e., when tax liability and income grow in equal scale. A progressive tax is characterizable by a higher than proportional growth in the tax onus in regard to the growth in income, and a regressive tax is characterizable by a less than proportional increase in the relative onus. Ergo, progressive taxes are viewed as reducing inequalities in income distribution, whereas regressive taxes are believed to result in increasing these inequalities.

The taxes that are normally thought to be progressive include individual income taxes and estate taxes. Income taxes that are categorically progressive, however, can become less so in the upper-income categories – especially if a taxpayer is permitted to reduce his tax base by claiming deductions or by excluding some certain income aspects from his taxable income. Proportional tax rates which are applied to lower-income groups can also be more progressive if such exemptions of a personal nature are declared.

Income measured over a given year does not necessarily provide the most appropriate measure of taxpaying requirements. For example, transitory increases in income may be saved, and in temporary declines in income a taxpayer may elect to pay for consumption by taking from savings. Therefore, if taxation is compared along with “permanent income,”it can be less regressive (or more progressive) than when held in comparison with annual income.

Sales taxes and excises (with the exception of those on luxuries) are usually regressive, because the spread of own income consumed or spent on a specific good declines as the level of personal income is raised. Poll taxes (also known as head taxes), levied as a standard amount per capita, clearly are regressive.

It is hard to term corporate income taxes and taxes on business as progressive, regressive, or proportionate, due to a lack of certainty about the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating who bears the tax burden rests crucially on whether a national or a subnational (that is, provincial or state) tax is being determined.

In considering the economic purposes of taxation, it is essential to distinguish between several ideas of tax rates. The statutory rates are those specified in the legislation; commonly these are marginal rates, but for some cases they are mean rates. Marginal income tax rates signify the fraction of incremental income that is taken by taxation when income rises by one dollar. Hence, if tax liability grows by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax legislation generally contain graduated marginal rates – i.e., rates that rise as income grows. Careful analysis of marginal tax rates need to take into account 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 rise in income, the marginal rate is 20 percentage points greater than indicated in the statutory rates. Since marginal rates display how after-tax income increases or decreases in response to changes in before-tax income, they are the important ones for regarding incentive effects of taxation. It is even more complicated to nominate the marginal effective tax rate applicable to income from business and capital, as it may be reliant on factors such as the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem holds that the marginal effective tax rate in income from capital is nothing under a consumption-based tax.

Average income tax rates show the portion of total income that is demanded in taxation. The pattern of average rates is the one that is in consideration for considering the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income.

Average earnings tax rates usually rise with income, both because personal allowances are allowed for the taxpayer and dependents and because marginal tax rates are graduated; conversely, preferential treatment of income received predominantly by high-income households can dampen these effects, allowing regressivity, as signified by average tax rates that decline as income rises.

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