Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which type of tax takes a higher proportion from low-income earners than high-income earners?

1. Proportional tax

2. Progressive tax

3. Indirect tax

4. Regressive tax

The correct answer is: Regressive tax

Regressive tax is characterized by taking a higher percentage of income from low-income earners compared to high-income earners. This occurs because regressive taxes are often fixed in nature, such as sales taxes or excise taxes, where the rate remains constant regardless of income level. As a result, low-income individuals tend to pay a larger share of their earnings on these taxes than wealthier individuals, leading to a disproportionate financial burden on those with lower incomes. In contrast, proportional tax applies the same tax rate across all income levels, meaning the proportion of income paid remains constant. Progressive tax is designed to increase the tax rate as income rises, so it does not impose a heavier burden on low-income earners. Indirect tax, while it can have varying impacts on income groups depending on consumption patterns, doesn't specifically target a higher proportion from lower income earners the way regressive tax does. Thus, regressive tax is the right answer, as it accurately reflects the structure that leads to lower-income earners contributing a higher percentage of their income compared to higher-income earners.