Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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Which of the following accurately describes a progressive tax?

It takes a higher percentage from those with lower incomes
It applies the same proportion of tax to all income levels
It takes a larger percentage as income increases
It is charged as a fixed rate on goods

The correct answer is: It takes a larger percentage as income increases

A progressive tax system is designed to ensure that individuals contribute to taxation based on their ability to pay. As one’s income increases, the percentage of income paid in taxes also increases. This means that those who earn higher incomes will face a higher tax rate compared to those with lower incomes. The rationale behind this system is to alleviate the financial burden on lower-income earners while generating more revenue from those who can afford to pay more. By structuring the tax in this way, governments aim to reduce income inequality and provide more social services and support for the population. This differentiates it from a flat tax system, where everyone pays the same percentage, regardless of their income level. The description aligns with the fundamental principles of a progressive tax, which is why it is recognized as the correct answer.