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Taxes can be differentiated by the effect they have on the distribution of income and wealth. A proportional tax is a kind that imposes the same relative burden on every taxpayer—i.e., in the case where tax liability and income grow in relative proportion. A progressive tax is characterizable by a larger than proportional growth in the tax liability in regard to the rise in income, and a regressive tax is recognised by a less than proportional rise in the comparative onus. Ergo, progressive taxes are regarded as fighting a lack of equality in income distribution, while regressive taxes might have the effect of an increase in these inequalities.

The taxes that are often considered progressive include individual income taxes and estate taxes. Income taxes that are declarably progressive, however, could become less so in the upper-income group—in particular if a taxpayer is able to reduce his tax base by declaring deductions or by taking particular income components from his taxable income. Proportional tax rates that are applied to lower-income categories would also be more progressive if such exemptions of a personal nature are made.

Income measured over a given period may not definitely offer the most appropriate measure of taxpaying status. For example, transitory growth in income might be saved, and during temporary declines in income a taxpayer may choose to pay for consumption by taking from savings. Therefore, if taxation is regarded alongside “permanent income,” it will be less regressive (or more progressive) than if it is held in comparison with annual income.

Sales taxes and excises (save on luxuries) tend to be regressive, because the spread of one’s income consumed or spent for a specific good decreases as the amount of personal income grows. Poll taxes (also known as head taxes), nominated as a fixed amount per capita, obviously are regressive.

It is complicated to dictate 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 dictating who bears the tax burden rests for the most part 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 necessary to distinguish between several ideas of tax rates. The statutory rates are nominated in legislature; generally speaking these are marginal rates, but in some cases they are average rates. Marginal income tax rates signify the fraction of incremental income demanded by taxation when income is increased by one dollar. Thus, if tax onus grows by 45 cents when income rises by one dollar, the marginal tax rate is 45 percent. Income tax statutes commonly contain graduated marginal rates—i.e., rates that increase as income rises. Careful analysis of marginal tax rates should regard provisions as well as the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) falls by 20 cents for each one-dollar increase in income, the marginal rate is 20 percentage points more than indicated in the statutory rates. Since marginal rates indicate how after-tax income increases or decreases 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 to apply to income from business and capital, as it may be dependant on factors including the structure of depreciation allowances, the deductibility of interest, and the provisions for inflation adjustment. A basic economic theorem grants that the marginal effective tax rate in income from capital is nil 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 important for judging the distributional equity of taxation. Under a progressive income tax the average income tax rate increases with income. Average income tax rates usually grow with income, both because personal allowances are permitted for the taxpayer and dependents and also due to that marginal tax rates are graduated; on the flip side, preferential treatment of income received fundamentally by high-income households may dwarf these effects, producing regressivity, as shown by average tax rates that decline as income rises.

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