Taxes can be categorized by the impact they have on the distribution of income and wealth. A proportional tax is the kind that puts the same relative onus on every taxpayer—i.e., where tax liability and income move in equal levels. A progressive tax is characterizable by a larger than proportional increase in the tax onus relative to the rise in income, and a regressive tax is recognised by a less than proportional rise in the related onus. So, progressive taxes are viewed as fighting inequalities in income distribution, whereas regressive taxes are seen to 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 initially progressive, however, can become less so within the upper-income class—in particular if a taxpayer is able to lessen his tax base by declaring deductions or by removing particular income elements 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 made.

Income measured over the period of a year may not definitely offer the most appropriate measure of taxpaying status. For example, transitory growth in income could be saved, and within temporary declines in income a taxpayer could opt to pay for consumption by taking from savings. Ergo, if taxation is compared with “permanent income,” it will be less regressive (or more progressive) than if compared with annual income.

Sales taxes and excises (excepting luxuries) are mostly regressive, because the dissemination of individual income consumed or spent for a specific good lowers as the amount of personal income increases. Poll taxes (also called head taxes), nominated as a flat amount per capita, obviously are regressive.

It is not simple to determine corporate income taxes and taxes on business as progressive, regressive, or proportionate, because of the uncertainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of dictating who bears the tax burden rests fundamentally on whether a national or a subnational (that is, provincial or state) tax is being determined.

In regarding the economic effects of taxation, it is relevant to differentiate between differing concepts of tax rates. The statutory rates are dictated in the law; often these are marginal rates, but in some cases they are mean rates. Marginal income tax rates signify the fraction of incremental income demanded by taxation when income is increased by one dollar. So, if tax onus increases by 45 cents when income increases 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 increases. Structured analysis of marginal tax rates must consider provisions apart from 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 greater than indicated within the statutory rates. Since marginal rates signify 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 difficult to understand the marginal effective tax rate applicable to income from business and capital, since it may be dependant on considerations including 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 nil under a consumption-based tax.

Average income tax rates indicate the percentage of total income that is taken in taxation. The pattern of average rates is the one that is in consideration for judging the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates commonly rise with income, both because personal allowances are permitted for the taxpayer and dependents and due to that marginal tax rates are graduated; conversely, preferential treatment of income received mostly by high-income households can dampen these effects, producing regressivity, as indicated by average tax rates that lessen as income increases.

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