In the context of tax efficiency, how does the rate of a proportional tax change as an individual's income increases?

• A. The tax rate decreases as income increases.
• B. The tax rate fluctuates unpredictably with income.
• C. The tax rate increases as income increases.
• D. The tax rate remains constant regardless of income.

Answer: (D)

Verified step by step guidance

1. Understand the definition of a proportional tax: it is a tax system where the tax rate is fixed and does not change with the level of income.
2. Recall that the tax rate in a proportional tax is expressed as a constant percentage of income, meaning the rate is the same for all income levels.
3. Analyze how the tax paid changes with income: since the rate is constant, the amount of tax paid increases proportionally as income increases, but the rate itself does not change.
4. Contrast this with progressive and regressive taxes, where the tax rate changes with income, either increasing or decreasing respectively.
5. Conclude that in a proportional tax system, the tax rate remains constant regardless of the individual's income level.