Okay...
Palm muting farther from the bridge (picking position and force held the same) gives a more 'choked' sound with less of everything and much less of anything that isn't the original 'woof'. Picking farther from the bridge (force held the same - BIG DIFFERENCE THAT SOME PEOPLE OVERLOOK) gives a rounder, less trebly sound.
When your string is vibrating, there are about a gazillion 'extra' vibrations (harmonics) in addition to the fundamental. You'll recall that you can produce harmonics by holding the string at certain points while picking... one of these points (let's pick 5th fret for the two-octaves-above harmonic) is called a 'node' for that harmonic. We'll get back to that.
Okay, so the usual analogy for a vibrating string is a jumprope. If you have two kids swinging a jumprope up and down uniformly, you have what looks like a big oval with no 'breaks' in the middle. This is what the fundamental would look like if that (and only that) rang out.
Now, have a third little bastard come along and hold it right in the middle. You'll have two ovals, half the length of the original, and if the kid grabbed it the right way the frequency would be twice as high. This is the harmonic you'd see if you held the 12th fret. The tension and string mass are the same, but the effective string length is half so the frequency is doubled (just like it would if you fretted the note at that point) - that vibration actually will look more like a very sideways and stretched out S, because one side goes up and the others go down, and the point in the middle where no vibrations occurs is the node... the vibration is now 'pivoting' around the two kids on the end and the one holding it in the middle. When you fret a string at the 12th fret, the effective length is cut in half, so it sounds an octave higher - this is like what's happening here, but because of the way the string vibrates this 'extra' vibration pops up.
At tons of places (the only bound for the number is the physical limitations of the string) you'll have nodes for this harmonic, that harmonic, whatever... the 7th/19th fret harmonic 'cuts' the string into thirds, the 5th/24th fret harmonic cuts the strings into fourths, and so on. So when you hold the string at some point, any harmonic that does not have a node (or that has some vibration at that point) is cut out and any harmonic that does have a node is relatively unaffected.
The harmonic 'nodes' actually wind up at spots on the string that are one 1/n*length (where n is any positive integer... so 1/1, 1/2, 1/3, 1/4, et cetera), so in order to preserve a given harmonic you have to not touch the string at any point that is not one its nodes or you will deaden it. When you deaden the string farther out, you're choking off a larger range of harmonics, and that's why muting the string farther out is darker and rounder. As far as picking farther out or farther in... slightly more complicated, but until I get to that just trust me that the higher harmonics are brought out more by picking nearer the bridge (clearly intuitive, if you just pick here and there on the string and listen closely, I'll explain the math when I'm not about to go eat) and this will be finished soon.
Jeff