A regressive tax is one in which the average tax rate does which of the following as income increases?

• A. Becomes negative
• B. Remains constant
• C. Increases
• D. Decreases

Answer: (D)

Verified step by step guidance

1. Understand the definition of a regressive tax: it is a tax system where the average tax rate decreases as the taxpayer's income increases.
2. Recall that the average tax rate is calculated as the total tax paid divided by total income, expressed as \(\text{Average Tax Rate} = \frac{\text{Total Tax Paid}}{\text{Income}}\).
3. Analyze how the average tax rate changes with income in a regressive tax system: as income increases, the proportion of income paid in taxes becomes smaller, so the average tax rate decreases.
4. Compare this behavior to other tax systems: in a progressive tax, the average tax rate increases with income; in a proportional tax, it remains constant; and a negative average tax rate would imply the government pays the taxpayer, which is not typical for regressive taxes.
5. Conclude that for a regressive tax, the average tax rate decreases as income increases, matching the correct answer.