Taxes can be categorized by the impact they have on the allocation of income and wealth. A proportional tax is a kind that applies the same relative requirement on all taxpayers—i.e., when tax liability and income increase in the same proportion. A progressive tax is characterizable by a higher than proportional growth in the tax onus in regard to the increase in income, and a regressive tax is characterizable by a less than proportional rise in the comparable onus. Thus, progressive taxes are regarded as taking away a lack of equality in income distribution, whereas regressive taxes might cause an increase in these inequalities.

The taxes that are normally thought to be progressive include individual income taxes and estate taxes. Income taxes that are declarably progressive, however, may become less so in the upper-income group—in particular if a taxpayer is able to reduce his tax base by claiming deductions or by excluding particular income parts from his taxable income. Proportional tax rates when applied to lower-income groups will also be more progressive if such personal exemptions are claimed.

Income measured over the course of a given period might not necessarily offer the best measure of taxpaying requirement. For example, transitory increases in income might be saved, and in temporary declines in income a taxpayer might select to finance consumption by reducing savings. Ergo, if taxation is compared alongside “permanent income,” it should be less regressive (or more progressive) than if held in comparison with annual income.

Sales taxes and excises (except those on luxuries) are generally regressive, because the portion of individual income consumed or spent for specific goods declines as the rate of personal income rises. Poll taxes (also known as head taxes), levied as a set 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 uncertainty regarding the ability of businesses to shift their tax expenses (see below Shifting and incidence). This difficulty of dictating who bears the tax burden is dependant essentially on whether a national or a subnational (that is, provincial or state) tax is being debated.

In considering the economic purpose of taxation, it is important to distinguish between differing ideas of tax rates. The statutory rates will include those specified in legislation; often 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 grows by one dollar. Ergo, if tax burden grows by 45 cents when income grows by one dollar, the marginal tax rate is 45 percent. Income tax legislature generally contain graduated marginal rates—i.e., rates that increase as income grows. Careful analysis of marginal tax rates must regard provisions other than the formal statutory rate structure. If, for example, a particular tax credit (reduction in tax) lowers by 20 cents for each one-dollar rise in income, the marginal rate is 20 percentage points more than specified in the statutory rates. Since marginal rates specify how after-tax income changes in response to changes in before-tax income, they are the relevant ones for regarding incentive effects of taxation. It is even more difficult to nominate the marginal effective tax rate applicable to income from business and capital, since 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 determines that the marginal effective tax rate in income from capital is zero under a consumption-based tax.

Average income tax rates indicate the portion of total income that is paid in taxation. The pattern of average rates is the one that is relevant for considering the distributional equity of taxation. Under a progressive income tax the average income tax rate rises with income. Average income tax rates generally rise with income, both because personal allowances are granted for the taxpayer and dependents and also because marginal tax rates are graduated; on the flip side, preferential treatment of income received for the most part by high-income households can dwarf these effects, forcing regressivity, as signified by average tax rates that decline as income grows.

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