American Institute of Certified Planners (AICP) Practice Exam

A regressive tax is characterized by what feature?

1. Tax rate increases as income rises

2. Tax rate is the same for all income levels

3. Tax rate declines as income rises

4. Tax rate favors low-income earners

The correct answer is: Tax rate declines as income rises

A regressive tax is characterized by a system where the tax rate decreases as an individual's income rises. This means that lower-income earners pay a higher percentage of their income in taxes compared to higher-income earners, effectively placing a larger burden on those with less ability to pay. For instance, sales taxes and some excise taxes are commonly viewed as regressive because they take a larger share of the income of low-income individuals than they do from wealthier individuals. In contrast, a progressive tax system, where the tax rate increases as income rises, is designed to impose a heavier burden on those with greater resources. A flat tax, which applies the same rate regardless of income level, does not take into account individuals’ differing capabilities to contribute based on their income. Finally, the definition of a regressive tax does not imply a favoring of low-income earners but rather indicates that they will shoulder a greater proportion of their income in taxes compared to high-income individuals.