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Taxes are categorized by the effect they have on the distribution of income and wealth. A proportional tax is the kind that places the same relative burden on all the taxpayers—i.e., when tax liability and income move in relative levels. A progressive tax is characterized by a greater than proportional rise in the tax burden in relation to the increase in income, and a regressive tax is characterized by a less than proportional rise in the relative liability. So, progressive taxes are thought of as taking away inequity in income distribution, whereas regressive taxes may have the result of an increase in these inequalities.

The taxes that are normally considered progressive include individual income taxes and estate taxes. Income taxes that are nominally progressive, however, could become less so within the upper-income demographic—particularly if a taxpayer is permitted to lessen his tax base by declaring deductions or by removing particular income components from his taxable income. Proportional tax rates if applied to lower-income groups will also be more progressive if personal exemptions are declared.

Income measured over a given year might not absolutely provide the best measure of taxpaying status. For example, transitory growth in income can be saved, and within temporary declines in income a taxpayer may opt to provide for consumption by reducing savings. Therefore, if taxation is held in comparison along with “permanent income,” it can be less regressive (or more progressive) than if it is made comparable with annual income.

Sales taxes and excises (excepting luxuries) are mostly regressive, because the share of own income consumed or spent for specific goods lowers as the rate of personal income rises. Poll taxes (also called 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, due to uncertainty around the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of nominating who bears the tax burden depends fundamentally on whether a national or a subnational (that is, provincial or state) tax is being considered.

In analysing the economic purpose of taxation, it is important to distinguish between various concepts of tax rates. The statutory rates include those specified in the legislation; generally speaking these are marginal rates, but for some cases they are median rates. Marginal income tax rates denote the fraction of incremental income taken by taxation when income is increased by one dollar. So, if tax liability increases by 45 cents when income increases by one dollar, the marginal tax rate is 45 percent. Income tax laws generally contain graduated marginal rates—i.e., rates that grow as income grows. Structured analysis of marginal tax rates must review 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 growth in income, the marginal rate is 20 percentage points higher than indicated in the statutory rates. Since marginal rates display how after-tax income changes in response to changes in before-tax income, they are the appropriate ones for assessing incentive effects of taxation. It is even more difficult to nominate the marginal effective tax rate to apply to income from business and capital, since it may rely on considerations including 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 zero under a consumption-based tax.

Average income tax rates determine the percentage of total income that is required 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 grows with income. Average income tax rates commonly grow with income, both because personal allowances are permitted for the taxpayer and dependents and because marginal tax rates are graduated; on the other hand, preferential treatment of income received predominantly by high-income households may dampen these effects, forcing regressivity, as signified by average tax rates that lower as income increases.

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