American Institute of Certified Planners (AICP) Practice Exam

Which type of tax system does not vary the rate with individual income levels?

1. Progressive tax

2. Regressive tax

3. Proportional tax

4. Discriminatory tax

The correct answer is: Proportional tax

The correct answer is a proportional tax system. This type of tax, often referred to as a flat tax, maintains the same rate regardless of an individual's income level. In a proportional tax system, all taxpayers pay the same percentage of their income, which means the rate does not change based on how much someone earns. This consistency across income levels distinguishes it from other tax systems. Progressive tax systems, in contrast, impose higher rates on those with higher incomes, leading to a varying tax burden based on the taxpayer's financial situation. Regressive taxes disproportionately impact lower-income individuals since the tax rate decreases as income rises, placing a heavier burden on those earning less. Discriminatory tax is not a recognized tax system and generally refers to practices that unfairly affect certain groups without a legitimate basis, rather than a standardized approach to taxation. This understanding of tax systems is essential for planners, as the choice between them can significantly influence economic behavior, equity, and funding for public services.