American Institute of Certified Planners (AICP) Practice Exam

Which tax type applies the same rate regardless of a taxpayer's income level?

1. Progressive Tax

2. Proportional Tax

3. Regressive Tax

4. Luxury Tax

The correct answer is: Proportional Tax

A proportional tax is designed to apply the same tax rate to all taxpayers, regardless of their income level. This means that individuals or businesses pay the same percentage of their income or value of goods, which can lead to a more straightforward and predictable tax scheme. For example, if the proportional tax rate is set at 10%, then both a person earning $30,000 and a person earning $300,000 would pay 10% of their earnings, resulting in $3,000 and $30,000 respectively. In contrast, a progressive tax system imposes higher rates on those with higher incomes, meaning that as income increases, the percentage of income paid in tax also increases. This aims to distribute the tax burden more equitably among taxpayers based on their ability to pay. A regressive tax operates in the opposite manner, imposing a higher percentage of tax on lower-income individuals compared to higher-income individuals, which can disproportionately affect those with less income. A luxury tax, meanwhile, is typically levied on high-end goods and services, targeting only specific products rather than applying uniformly across all income levels. Thus, the key characteristic of a proportional tax is that it maintains a consistent rate for all taxpayers, distinguishing it from other tax types that vary