Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What characterizes an ad valorem tax?

Charged as a fixed sum per unit sold
Charged as a fixed percentage of the price of the good
Takes a larger percentage from low-income earners
Takes the same proportion of income from all levels of income

The correct answer is: Charged as a fixed percentage of the price of the good

An ad valorem tax is characterized as a tax levied based on the value of a good or service, meaning it is charged as a fixed percentage of the price of the item being sold. This reflects the inherent value of the good, so as the price increases, the amount of tax collected also rises in proportion to that increase. This system is often used for sales taxes and property taxes, allowing the tax burden to adjust according to the market value of the good or property, rather than imposing a fixed dollar amount regardless of value. The other options represent different types of taxation or characteristics unrelated to ad valorem taxes. An amount charged as a fixed sum per unit sold rather describes a specific tax rate rather than a value-based rate. Tax systems that take a larger percentage from low-income earners or the same proportion of income from all income levels are more indicative of regressive or proportional tax structures, which differ from the value-based principle of ad valorem taxation. Thus, the defining feature of an ad valorem tax is indeed its basis on a fixed percentage of the price.