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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 places the same relative requirement on each taxpayer—i.e., in the case where tax liability and income increase in relative proportion. A progressive tax is characterizable by a more than proportional growth in the tax burden in regard to the growth in income, and a regressive tax is recognised by a less than proportional growth in the relative burden. So, progressive taxes are thought of as removing the lack of equality in income distribution, whereas regressive taxes are seen to result in an increase these inequalities.

The taxes that are normally believed to be progressive include individual income taxes and estate taxes. Income taxes that are declarably progressive, however, could become less so for the upper-income class—particularly if a taxpayer is allowed to lessen his tax base by nominating deductions or by removing some certain income parts from his taxable income. Proportional tax rates that are applied to lower-income groups could also be more progressive if such exemptions of a personal nature are claimed.

Income measured over a given year may not absolutely give the best measure of taxpaying requirement. For example, transitory growth in income could be saved, and during temporary declines in income a taxpayer might decide to pay for consumption by decreasing savings. Therefore, if taxation is regarded with “permanent income,” it can be less regressive (or more progressive) than when it is compared with annual income.

Sales taxes and excises (save on luxuries) are mostly regressive, because the spread of one’s income consumed or spent on a specific good decreases as the amount of personal income is raised. Poll taxes (aka head taxes), calculated as a set amount per capita, clearly are regressive.

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

In regarding the economic effect of taxation, it is essential to distinguish between several ideas of tax rates. The statutory rates include those dictated in the legislation; generally speaking these are marginal rates, but in some cases they are mean rates. Marginal income tax rates note the fraction of incremental income demanded by taxation when income grows by one dollar. Thus, if tax onus increases by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax laws often contain graduated marginal rates—i.e., rates that increase as income grows. Heavy analysis of marginal tax rates need to consider 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 growth in income, the marginal rate is 20 percentage points higher than indicated by 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 regarding incentive effects of taxation. It is even more complicated to nominate the marginal effective tax rate to apply to income from business and capital, since it may rely on such factors as the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem shows that the marginal effective tax rate in income from capital is nothing under a consumption-based tax.

Average income tax rates show the part of total income that is paid in taxation. The pattern of average rates is the one that is important for considering 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 allowed for the taxpayer and dependents and because marginal tax rates are graduated; on the other hand, preferential treatment of income received fundamentally by high-income households can dwarf these effects, allowing regressivity, as displayed by average tax rates that lower as income increases.

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