Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What tax type takes the same proportion of income in tax from all income levels?

Progressive tax
Regressive tax
Proportional tax
Specific tax

The correct answer is: Proportional tax

The tax type that takes the same proportion of income from all income levels is known as proportional tax. This means that regardless of how much a person earns, they will pay the same percentage of their income as tax. For example, if the proportional tax rate is set at 10%, both a person earning $30,000 and another earning $300,000 would pay 10% of their income. This structure contrasts significantly with progressive tax systems, where the tax rate increases as the income level rises, leading to higher earners paying a larger percentage of their income compared to lower earners. Similarly, regressive taxes impose a greater burden on those with lower incomes, as individuals with lower incomes pay a higher percentage of their income in tax compared to wealthier individuals. Specific tax is a tax on specific goods or activities, like excise taxes, rather than on income levels. Proportional tax ensures that every taxpayer contributes the same rate, promoting equality in tax contribution relative to income.