It uses iptables (on Linux) to route all traffic (or selected traffic) through the client-side component, and then forward it all to the server-side component.

"ssh -D" is closer to a proxy server:

     -D [bind_address:]port
	     Specifies a local "dynamic" application-level port forwarding.
	     This works by allocating a socket to listen to port on the local
	     side, optionally bound to the specified bind_address.  Whenever a
	     connection is made to this port, the connection is forwarded over
	     the secure channel, and the application protocol is then used to
	     determine where to connect to from the remote machine.  Currently
	     the SOCKS4 and SOCKS5 protocols are supported, and ssh will act
	     as a SOCKS server.	 Only root can forward privileged ports.
	     Dynamic port forwardings can also be specified in the configura-
	     tion file.

On the other hand, sshuttle is closer to a VPN connection. If you're confused about the difference between a proxy and a VPN, then I suggest you hit up Wikipedia and do some reading.