Association of Chartered Certified Accountants (ACCA) Certification Practice Test

How is a regressive tax characterized?

1. It is uniform across all income levels

2. It increases as income increases

3. It decreases as income rises

4. It takes more from the poor than from the rich

The correct answer is: It takes more from the poor than from the rich

A regressive tax is characterized by the fact that it effectively takes a larger percentage of income from low-income earners compared to high-income earners, leading to a disproportionate financial burden on those with lesser means. This is fundamentally different from progressive taxation, where tax rates increase with income, or flat taxes that maintain a constant rate across all income levels. When analyzing the essence of a regressive tax, it is important to recognize that it often relies on fixed rates or amounts that do not change based on the taxpayer's income. As such, individuals with lower incomes end up spending a higher proportion of their income on this tax compared to wealthier individuals. This creates a scenario where the economic impact is more significantly felt by the poorer segments of the population, highlighting social inequity in taxation systems. In contrast, uniform taxes do not show the same progressive or regressive nature, and taxes that increase with income do not align with the regressive framework. Therefore, the correct characterization of a regressive tax emphasizes its heavier impact on those with lower incomes relative to those with higher incomes.