Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which taxation system charges the same rate regardless of income levels?

1. Progressive tax

2. Regressive tax

3. Proportional tax

4. Indirect tax

The correct answer is: Proportional tax

A taxation system that charges the same rate regardless of income levels is known as a proportional tax. In this system, taxpayers pay the same percentage of their income in taxes, meaning that whether someone earns a modest income or a significantly higher one, the tax rate applied remains constant. This creates a straightforward and equitable structure where all taxpayers contribute a uniform percentage. In contrast, a progressive tax system increases the tax rate as income levels rise, meaning that higher earners pay a larger percentage of their income in taxes compared to lower earners. A regressive tax system, on the other hand, imposes a larger burden on low-income earners than on high-income earners, often because the tax is applied uniformly but affects lower earners more significantly. Lastly, an indirect tax is applied to goods and services rather than directly on income, making it distinct from the proportionate taxation of income streams.