Which of the following scenarios best illustrates a regressive tax?

• A. A sales tax that takes a larger percentage of income from low-income individuals than from high-income individuals.
• B. An income tax system where higher earners pay a higher percentage of their income in taxes.
• C. A property tax that increases as the value of the property increases.
• D. A tax credit that benefits only those with high incomes.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the definition of a regressive tax. A regressive tax is one where the tax rate effectively decreases as the taxpayer's income increases, meaning lower-income individuals pay a higher percentage of their income compared to higher-income individuals.
2. Step 2: Analyze each scenario in terms of how the tax burden changes relative to income. For example, a sales tax is typically a fixed percentage on purchases, so it takes a larger share of income from low-income individuals because they spend a higher proportion of their income on taxable goods.
3. Step 3: Compare this with a progressive tax system, such as an income tax where higher earners pay a higher percentage of their income, which is the opposite of regressive.
4. Step 4: Consider a property tax that increases with property value. Since property value often correlates with wealth, this tax tends to be proportional or progressive rather than regressive.
5. Step 5: Evaluate a tax credit benefiting only high-income individuals. This is more about tax benefits distribution rather than the tax rate structure itself, so it does not illustrate a regressive tax.