While Muggleborn wizards and witches are never shown in canon to have lesser magical abilities than their pureblood equivalents (witches and wizards born to two wizarding parents, neither of which are Muggleborn), and are in fact often proven to be more capable, they are looked down upon by some purebloods. Under a government controlled by the Dark Lord Voldemort, they were accused of stealing magic and persecuted accordingly. Death Eaters and their supporters view them as one step above Muggles, although one could argue that they are viewed as one step below Muggles because they are 'pretending to be real wizards and witches' and 'stealing magic from purebloods'. Blood-traitors (pureblood wizards and witches who do not follow or support Voldemort and who like Muggles and Muggleborns) and half-bloods (wizarding children born to a wizard/witch and a Muggle) tend not to share these views, and treat Muggleborns as normal members of society.
A derogatory term for Muggleborns is 'Mudblood'. This is the approximate equivalent of the World One N-word, and is highly insulting. Do not use it casually.